There's no question that Zoom Video Communications (ZM 1.57%) has been one of the big winners in the coronavirus economy so far. The cloud-based videoconferencing specialist has seen its shares jump as much 62% since the broad-market sell-off started on February 24, and it's clear why.
With its popular videoconferencing service, Zoom is perfectly positioned for the current work-from-home economy, as its tools allow people at companies, schools, and other organizations to easily interface with one another while they are stuck at home because of the COVID-19 outbreak. Its user base has soared past 200 million, and even before the pandemic gripped the country, Zoom was seeing blockbuster growth with revenue up 78% in its most recent quarter.
Image source: Getty Images.
However, there are several reasons why Zoom may not be the best bet in the coronavirus economy. First, security and privacy concerns have been mounting against the company and have piqued the interest of New York's Attorney General, among other regulators. At the same time, Zoom's sudden growth has attracted new competition like RingCentral, and several tech giants like Microsoft and Alphabet already offer competing products. If they see Zoom generating bumper profits, they're likely to invest more in their videoconferencing products, or launch a new product, much like the way Microsoft introduced Teams to compete with Slack.
Additionally, there are valid questions about the cloud stock's valuation, which has risen to stratospheric levels at a price-to-sales ratio of 39 based on this year's revenue forecast, but the biggest reason to be skeptical of Zoom is that the company's recent boom will only last as long as the pandemic does. The upcoming recession is already forcing layoffs and corporations to downsize, and will likely lead to a number of bankruptcies. That means that Zoom's potential customer base will shrink, and some of its current customers may be forced to scale back usage as well.
There will also be a pent-up desire for traditional face-to-face meetings after so much time using videoconferencing out of necessity. Sales pitches, for example, will go back to taking place at a bar, a coffee shop, or on the golf course rather than in front of a computer. While some recent Zoom customers are likely to stick with the service, most will probably be glad to go back to doing business with a handshake rather than a mouse-click, and that means the recent spike in demand will only be temporary.
Image source: Chewy.
A better option
There's another stock that's also been a strong performer during the coronavirus crisis, but its growth has largely taken place without the fanfare from the financial media that Zoom has experienced. Chewy (CHWY 2.99%), the online seller of pet products, has seen its shares gain 14% since the coronavirus sell-off, and the stock is up nearly 70% since it hit a bottom on March 12.
That turnaround has come as Chewy is benefiting from a number of surprising trends. First, demand for pets and pet adoptions has soared during the crisis. According to SEMRush, internet searches for "adopt a pet" rose 334% from March 12 to March 28, with searches for dogs and cats both up 300% during that time. Animal shelters and adoption centers across the country are reporting unprecedented interest and even a shortage of pets to adopt during the crisis. It's not surprising to see demand for pets soar right now. The furry friends are known to be stress relievers and a great way to keep kids occupied for parents who need to work from home. Additionally, other Americans stuck at home with extra time on their hands right now might want a pet to keep them company and to develop a new hobby.
That means Chewy has likely gained thousands of new customers in recent weeks as all those new pets will need a steady source of food coming their way as well as toys and other accessories. As an online retailer, the company is also well positioned for the current market to win market share from brick-and-mortar retailers whose stores may be closed or whose customers simply prefer to shop online to avoid exposure to the coronavirus right now. If the crisis lasts long enough, it could force some pet stores to close their doors permanently.
But most importantly, unlike Zoom, Chewy is equally well positioned for a recession. Pet products were one of the few product categories to see sales growth during the financial crisis as Americans need to keep feeding their pets even in hard times, and don't want to deprive them of their usual treats. Therefore, the thousands of pets that Americans have adopted during the crisis will act as annuities for pet supply companies, ensuring them a steady cash flow for at least the next decade. Combine that factor with Chewy's competitive advantage over brick-and-mortar retailers, and the company should thrive over the coming years, regardless of the state of the greater economy. In fact, an extended crisis could simply lead to more pet adoptions and therefore more long-term business for Chewy.
Zoom is in a much different position, as there's no guarantee that the company's new business will stick around once the outbreak fades. For investors looking to capitalize on the coronavirus economy, Chewy looks like the better long-term pick.
