Author Topic: Pandemic boosted stocks  (Read 679 times)

MustacheAndaHalf

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Pandemic boosted stocks
« on: March 08, 2021, 01:06:30 PM »
As vaccine hopes are getting realized, stocks that benefitted heavily from lockdowns are losing ground.  Stocks like Amazon have gone nowhere for 6 months (-5%), despite a 2-year performance of +85%.  The flip side of that are recovery ETFs/stocks, like oil & gas (XOP +91% in 6 months, but -21% over 2 years).

I think there's some non-tech stocks that are going to see their earnings... vaccinated.  So I've bought put options against UPS.  Their stock price went from $90-$120, skyrocketing to $160 in mid 2020... and it's still there.  Yahoo and Morningstar both agree UPS's P/E ratio is over 100.  With 2020 over, I expect their earnings to revert to past values, and their stock price with it.  I measured the risk I was willing to take - and bought put options.

A counter example is Chipotle, which gained +70% during 2020.  That combined with their 100+ P/E suggests they might hit trouble ahead... but they grew +67% in 2019, so it's not a clear pick.

Besides P/E, I wonder what a good criteria is for spotting overpriced stocks that did poorly before 2020, and exceptionally well during 2020.  (I'm avoiding tech stocks, since I'm not clear on their upper bound)

ChpBstrd

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Re: Pandemic boosted stocks
« Reply #1 on: March 08, 2021, 02:01:22 PM »
In Chipotle's case, they are a fast-growing stock that barely got dented by the pandemic (19% ROE while adding 146 restaurants during a global emergency ain't bad) and is poised to resume earnings growth in the post-pandemic world. Chipotle was attractive in 2019, and will be attractive in 2022.

UPS --- hmmm --- maybe the assumption there is that all bricks-and-mortar is going away and UPS will capture most of what used to be the economy's retailing profits. Except their net income dropped 70% from 2019 to 2020. Now, rising interest rates are a threat because of their massive debt/equity of 4,150! UPS was a bleh stock in 2019 and may be a disaster by 2022.

The recent divergence in their stock prices reflects a realization that rising interest rates are bad for companies that can only generate decent ROE with massive amounts of cheap debt. Perhaps some investors a few months ago assumed near-zero interest rates would be with us for the foreseeable future, and in that world UPS is attractive. However, their ROA, profit margin, and operating margin are all in the 1.5% range, so that gives one a sense what will happen if debt gets expensive to roll over.

In terms of screeners, I'd look for rapid earnings or free cash flow growth over the past 5 years, ignoring 2020. Then I'd screen for low leverage, like <200% debt/equity. Then I'd screen for ROE > 10%. PE or any other metrics related to earnings / cash flow is trash for the year 2020. Recalculate the numbers for 2019 earnings / cash flow, unless these have been impaired or enhanced. E.g. UPS pays more for fuel, CMG has opened more restaurants, oil companies get higher prices and reduced supply, etc. Usually the analysts do a better job at this than we could ever do ourselves.

And usually when we pick stocks, we underperform VTI.

MustacheAndaHalf

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Re: Pandemic boosted stocks
« Reply #2 on: March 08, 2021, 09:47:22 PM »
I seem to have beaten VTI handily in 2020, but as I sell my winners I plan to shift back towards passive index funds.

Your point about high growth stocks is interesting, and certainly some tech stocks are dropping or stalling during this recovery period.  But I worry rapid growth could continue if interest rates don't go higher.  At least with low growth stocks that surged in 2020, I can expect them to fall back to former levels if their former earnings return.

A tricky one is Morningstar (MORN), which is probably riding the wave of retail investors.  I don't expect the surge of retail investing to continue.  So I expect their 2021 revenues to drop as people lose interest.  That's one of my weakest cases, so I put less behind that speculation.

I know there's a general fear of rising interest rates, but there's also the view that the surge is temporary, and will even out.  Right now it looks like rates are rising sharply, so we'll have to see if reopening keeps pace.

ChpBstrd

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Re: Pandemic boosted stocks
« Reply #3 on: March 09, 2021, 07:14:05 AM »
My baseline scenario is a return to the interest rates prevailing in 2019, back when we thought we were bouncing along the bottom because rates couldn't possibly go lower.

This would still be fairly close to wide-open-throttle, and I think it'll be the same wide-open-throttle that failed to ignite inflation a couple of years ago when the savings rate was 7.5%. Yes, people will blow their stimmie checks, but that's a drop in the bucket compared to the 20% savings rate we're seeing right now .

https://fred.stlouisfed.org/series/PSAVERT

The demographic picture, the export of dollars overseas, and the flow of cash into housing and investment semi-bubbles instead of exchanges that are non-zero-net-sum - not much has changed that would affect the slowing pace of monetary velocity.

bwall

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Re: Pandemic boosted stocks
« Reply #4 on: March 09, 2021, 07:56:47 AM »
My baseline scenario is a return to the interest rates prevailing in 2019, back when we thought we were bouncing along the bottom because rates couldn't possibly go lower.

This would still be fairly close to wide-open-throttle, and I think it'll be the same wide-open-throttle that failed to ignite inflation a couple of years ago when the savings rate was 7.5%. Yes, people will blow their stimmie checks, but that's a drop in the bucket compared to the 20% savings rate we're seeing right now .

https://fred.stlouisfed.org/series/PSAVERT

The demographic picture, the export of dollars overseas, and the flow of cash into housing and investment semi-bubbles instead of exchanges that are non-zero-net-sum - not much has changed that would affect the slowing pace of monetary velocity.

Great graph! Thanks for sharing.

I also think that inflation concerns are way outta whack.

I'm glad the yield curve is steepening--it's better than an inverted yield curve, right?

The rotation in the stock market that we're seeing now is not a concern to me, in my opinion. Just enough to keep everyone on their toes and a gentle reminder that there is no such thing as a sure thing or a one-way bet. Perhaps it will even help broaden the base for an extended bull market-who knows.

And a 20% savings rate. That's amazing! As a mustachian, I'm glad to see that Americans are getting their personal balance sheets in order. I've been of the opinion that Americans' savings rate is much lower than in other countries for the simple reason that most people in the USA have no real memory of hard times. In other countries, hard times were a way of life--and maybe even still are. Thus, they have higher savings rates.

Between the financial crisis and covid, perhaps some Americans are changing their spending habits.

MustacheAndaHalf

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Re: Pandemic boosted stocks
« Reply #5 on: March 09, 2021, 08:20:24 AM »
I expect that high savings rate is a combination of fear/uncertainty/doubt, restrictions on where people can go to spend money, and stimulus money.  If most of the 20% savings rate is from those factors, then most of it will be going away this year.  I see the travel and hotel stocks' recovery as pointing in that direction.

As a counter-point, I believe people who lived through the great depression have a very strong appreciation for saving money.  I don't know that 2020 was enough to change attitudes that much, but unemployment hasn't recovered yet.

Today, with rates lower, the stock market essentially reversed: tech stocks up, recovery stocks down.  So that's another reason for me to avoid buying put options on strong growth stocks - I don't know where interest rates are headed.

Am I underestimating the power of pizza?  Because that's supposedly going to eventually add 8% to the sales numbers of Red Robin Gourmet Burgers (RRGB), which is +50% above it's 2019 levels.  I think my next put option is taking shape, but maybe I'll do a fraction now, and wait to invest more as the reopening continues.

ChpBstrd

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Re: Pandemic boosted stocks
« Reply #6 on: March 09, 2021, 08:33:40 AM »
I've been of the opinion that Americans' savings rate is much lower than in other countries for the simple reason that most people in the USA have no real memory of hard times. In other countries, hard times were a way of life--and maybe even still are. Thus, they have higher savings rates.

Between the financial crisis and covid, perhaps some Americans are changing their spending habits.

You might be right. For Americans, "hard times" generally means 10% of us get different jobs, and go a couple of months with a smaller paycheck from unemployment insurance, which itself is probably more than 90% of the world earns. We're spoiled rotten compared to people in China, India, or most parts of Africa or South America.

However, I'll add that Americans may be exposed to more advertisements than people in high-savings parts of the world. Judging my our time usage, watching ads on our cell phones, computers, and TVs is our most popular national pastime. We all think it doesn't affect us, but then again, here we are. I'm glad the MMM forum is basically ad-free.

It would be interesting to take ad spending per capita and compare it with savings rate by country. In theory, high ad spending means saturated markets and high advertising costs targeted at big spenders.
https://trends.e-strategyblog.com/2014/07/24/global-ad-spending-per-person-by-country-2012-2018/20371/

MustacheAndaHalf

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Re: Pandemic boosted stocks
« Reply #7 on: March 10, 2021, 06:35:38 AM »
... add 8% to the sales numbers of Red Robin Gourmet Burgers (RRGB), which is +50% above it's 2019 levels.  I think my next put option is taking shape, but maybe I'll do a fraction now, and wait to invest more as the reopening continues.
I've started this investment (put spread on RRGB), in case valuations don't go much higher.  I expect stocks will keep pushing upwards (the 1.9T stimulus hasn't even been signed into law, yet) during the recovery, so I'm leaving most of the investment for later.


ChpBstrd - Combining what two CNBC contributors said: one predicted we could see 10% GDP growth this year.  That raises the question: can inflation go nowhere while GDP rises that much?  And the second contributor believes tech stocks will fall further because inflation isn't done.  So those views seem supportive of what your investment thesis: if inflation goes up, we'll see tech stocks drop in price.

bwall

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Re: Pandemic boosted stocks
« Reply #8 on: March 10, 2021, 07:20:16 AM »
Spending and advertising. There might be correlation, but is there causation? It might sound counterintuitive to ask, but perhaps the high advertisement is caused by high level of spending?

I read this book years back and I found it eye opening. It helped put me on an anti-consumer kick that, well, I might still be on, thanks to the MMM support network. I highly recommend it to anyone wondering 'why do I want to buy that?'

https://www.amazon.com/All-Consuming-Century-Commercialism-Modern-America/dp/0231113137/ref=sr_1_1?dchild=1&keywords=all+consuming+century&qid=1615385444&sr=8-1

I know that in China the savings rates are super-high. Also, they've experience famine and internal political upheaval in living memory, as well as grinding poverty from the time of cave men up until, well, about two weeks ago:
https://www.straitstimes.com/asia/east-asia/chinas-xi-declares-complete-victory-in-poverty-eradication-campaign
So, of course they're saving money like crazy in China. They'd be crazy not to!

The history of the USA is much different, of course. Lots of prosperity here.

bwall

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Re: Pandemic boosted stocks
« Reply #9 on: March 10, 2021, 07:50:15 AM »
@MustacheAndaHalf ; The interesting thing about economic growth is that, if it is due to increased total factory productivity there is no need for inflation to appear. If there is no increase in productivity, well, it's hard NOT to have inflation.

The question one must ask themselves now:

A) Has the pandemic spurred changes in technology (or business' investments in technology) that have increased productivity? Voila! Very low inflation.

Or

B) Has there been no increase in productivity, just a mere suppression of consumer demand (re: Soviet Union economic system) that will be unleashed once people are allowed to roam free. Bam! Get ready for inflation!!

Take a look around your workplace and how do you see a post-pandemic world? Of course, it varies according to your work place. Here's what I see when I take a look.

Less business travel. People will still travel, just not as much or as often. This means fewer first class plane tickets booked, fewer posh downtown hotels/conference rooms booked and less big splurges at restaurants/catering companies. Winners: Companies not spending the money will have now more profits. Losers: economy airplane passengers, hotels, restaurants, car rental companies. These workers (at the margin) who are not re-hired, etc. will now be free to work elsewhere, thus boosting the aggregate macro-economic productivity of the country.

Untethering. People will now be free to work from anywhere, or just about. Some people will choose to leave HCOL areas for lower COL areas. This will be a boon for the areas receiving people as well as HCOL areas, as it will free up more space in HCOL areas for new arrivals. Thus, productivity rises. Losers: I can't really see any losers here.

Education market and health care. Two markets that are over-ripe for disruption via video conferencing, or whatever. No idea how this plays out. But there are billions to be earned here by the ones who figure it out. Why couldn't a university post a professor's lectures for the semester online, for the next 20 years instead of making this poor guy go the room and say the same thing year after year? Same thing for health care. How to streamline that bloated carcass of waste? No idea, but it needs to happen. If we can cut a few billion off of these big ticket items and have the same results in the aggregate, this would be an enormous boost in productivity.

New hobbies; How many people learned to cook or garden as a result of the pandemic? Not many, I'm sure, but if that results in less restaurant meals and less shopping for food, then this would be a sign of increased productivity. Winner: the hobbyist who now has more money in their pocket (as well as the suppliers of their new hobby) Losers: The former providers, who, at the margin, are now available to find new work. Thus, aggregate productivity increases.

I'm sure there are other things that I can't think of and there's a good chance I'm wrong. I kinda geek-out on this economic stuff. Most people find it boring, so if you can't sleep at night, come back and read the post a few times until you fall asleep! :)



ChpBstrd

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Re: Pandemic boosted stocks
« Reply #10 on: March 10, 2021, 08:27:40 AM »
@bwall I share your optimism that the pandemic could be a booster for productivity-enhancing technology.

Imagine the savings if companies were able to reduce office space expenses by just 20%. That's a whole lot of SG&A that can instead be returned to shareholders or reinvested.
Imagine the growth of new tech companies finding better ways to meet rather than Zoom. Search virtual reality meeting for a taste of what's to come.
Imagine business operating at the speed of online meetings instead of airport security lines. E.g. contracts negotiated and executed within days instead of weeks.
Imagine millions of people replacing their commuting time with working time. E.g. working 10h/day instead of working 8h/day and commuting 2h/day.
Imagine the decline in harassment lawsuits, worker's comp claims, losses due to contagious diseases like the flu, etc. when workers are not physically proximal.
Imagine all the people with family obligations who were previously out of the labor market but can now work PT or FT while caring for a relative or child.

There will be lots of losers, as there are every time productivity increases:
 -HCOL area property owners
 -automobile and fossil fuel industries
 -office property owners who will have to convert to lower-yielding residential at great expense
 -professional clothing industry
 -restaurant industry (why eat out every day when you could raid the fridge?)
 -office furniture and supplies industry
 -road maintenance industry (unless more delivery trucks batter the roads faster than the dozens of car trips each truck trip replaces)
 -airlines
 -hotels
 -downtown business districts
 -extroverts

bwall

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Re: Pandemic boosted stocks
« Reply #11 on: March 10, 2021, 09:19:06 AM »
@ChpBstrd ; That's an impressive list. Perhaps the most depressing item on the list of losers was the last one, easily overlooked, with no context required; -Extroverts. Yep. I guess I identify as an extrovert.

Does your regular job require you to think of this stuff? Or do you ponder these topics in your free time? I ask b/c your list seems to be well thought out and very inclusive.

An increase in aggregate productivity in the USA would be especially optimistic, since as a service-based economy, the US bounced back slower than China. As a manufacturing based economy, China was able to get back to work quicker and safer than in the West with their service based economies. However, that same constellation also prevents China from adopting the same productivity enhancing tools with the same effect.

In other words, in 2021 the USA might be about to have higher annual economic growth than China for the first time since.... 1989?

MustacheAndaHalf

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Re: Pandemic boosted stocks
« Reply #12 on: March 10, 2021, 09:58:33 AM »
One area where I think we're biased on MMM forums, is viewing LCOL vs HCOL as an interesting tradeoff that saves money.  I think most people don't even make the calculation - they only try to save money when forced to do so.

My predictions about UPS are based on events happening many months from now, and so it's a little odd of me to invest all at once.  So today I was able to trim my position in UPS put options, luckily only paying the commission twice.  I plan to get back in later, and try to be more gradual about it, like I've done with RRGB.


@bwall - Switching from TV contributors to data, I have trouble believing the 10% GDP figure.  In 2020, GDP fell just 3.5% in real terms according to the Bureau of Economic Analysis (bea.gov):

"Real GDP decreased 3.5 percent in 2020 (from the 2019 annual level to the 2020 annual level), compared with an increase of 2.2 percent in 2019 (table 1)."
https://www.bea.gov/news/2021/gross-domestic-product-4th-quarter-and-year-2020-advance-estimate

Looking at their graph, the 2020 q2 drop was very steep... but the 2020 q3 increase was equally sharp.  Maybe we more than recover the 3.5% lost... but I don't see where that CNBC contributor got 10%... maybe they referred to it for shock value?  Like taking the most extreme price target for a stock.

I suppose we could look at company expenses, to see how much air travel and catering to clients costs.  I expect it's a smaller factor than leasing office space, which will be the most interesting thing to watch.

If presenting over Zoom is less impressive than presenting in person, then companies that send salespeople/negotiators on business flights might get an advantage in landing customers.  Once some businesses are successful traveling, I would imagine other companies will do the same.  But it really depends how well in person vs Zoom plays out when both are available options.

ChpBstrd

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Re: Pandemic boosted stocks
« Reply #13 on: March 10, 2021, 11:25:58 AM »
Does your regular job require you to think of this stuff? Or do you ponder these topics in your free time? I ask b/c your list seems to be well thought out and very inclusive.

An increase in aggregate productivity in the USA would be especially optimistic, since as a service-based economy, the US bounced back slower than China. As a manufacturing based economy, China was able to get back to work quicker and safer than in the West with their service based economies. However, that same constellation also prevents China from adopting the same productivity enhancing tools with the same effect.

In other words, in 2021 the USA might be about to have higher annual economic growth than China for the first time since.... 1989?

I think about such things because I'm fascinated by my own poor judgment, failed predictions, and missed trends, despite my absorption of tons of information. Markets and the evolution of history seem to defy rationality when one is making predictions, but then events have clearly visible reasons in hindsight. This contradiction has me constantly trying to make predictions, to get more exposure to failures and successes.

It would be tough for the US to exceed Chinese levels of growth for longer than a quarter or so. Our level of indebtedness is high enough to stifle innovation (recall the 1980s when Japan was the undisputed innovation leader?). Throughout the pandemic, the spread between US and Chinese GDP growth stayed around 5%. https://www.cnbc.com/2021/02/01/new-chart-shows-china-gdp-could-overtake-us-sooner-as-covid-took-its-toll.html

bwall

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Re: Pandemic boosted stocks
« Reply #14 on: March 11, 2021, 05:28:45 AM »
I agree that 10% is a bit of a stretch. i do believe that 6-7% annual GDP growth in 2021 in the USA is feasible, due to increased productivity and pent-up demand.

I also believe that China's growth rate is slowing and will continue to do so. So, even at 6-7% annual growth we could outperform China.  Time will tell.

Most of the changes will be at the margin. Meaning, there will be plenty of meetings in person and on Zoom, but perhaps not as many in person as before.

In my company we generally never meet our clients. We have standardized products that we sell, so we don't need to meet. Usually when we met clients it didn't really lead to sales, just a way of getting to know the client better, or the market better.

bwall

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Re: Pandemic boosted stocks
« Reply #15 on: March 11, 2021, 05:56:24 AM »
I think about such things because I'm fascinated by my own poor judgment, failed predictions, and missed trends, despite my absorption of tons of information. Markets and the evolution of history seem to defy rationality when one is making predictions, but then events have clearly visible reasons in hindsight. This contradiction has me constantly trying to make predictions, to get more exposure to failures and successes.

It would be tough for the US to exceed Chinese levels of growth for longer than a quarter or so. Our level of indebtedness is high enough to stifle innovation (recall the 1980s when Japan was the undisputed innovation leader?). Throughout the pandemic, the spread between US and Chinese GDP growth stayed around 5%. https://www.cnbc.com/2021/02/01/new-chart-shows-china-gdp-could-overtake-us-sooner-as-covid-took-its-toll.html

Poor judgement, missed trends and failed predictions..... I've got a nice list of those as well. Anyone who doesn't isn't trying, IMO.

I don't see indebtedness as stifling innovation. I believe innovation does or doesn't occur due to a special mix of scientific breakthroughs/eureka moments, entrepreneurial activity and a Goldilocks-style touch of regulation. Just about every developed country in the world would love to have just one hub of innovation. And we have two! Silicon Valley and the northeast corridor (NYC-Boston), with other areas showing promise (Austin, So. Cal., PNW), plus I'm sure that there are areas I'm overlooking or mis-weighting in my analysis.

MustacheAndaHalf

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Re: Pandemic boosted stocks
« Reply #16 on: March 11, 2021, 09:19:26 AM »
I had a failed prediction of the second wave of Covid-19 in the U.S. - actually the wave happened like I predicted, but responses were surprising.  I didn't expect Florida's governor to use the defense that the hospitals aren't full yet...

I imagine 6% GDP growth would just be extrapolating a recovery(3.5%) + 2019 (2.2%), to get near 6% GDP.  But do estimates of 6-7% assume normal employment levels?  Unemployment is in the 7-10% range depending on the measure used.

I'm still waiting for Biden to sign the $1.9T Covid relief bill, at which point I expect another spike in stock prices - including for stocks that are already at excessive P/E ratios.  My current portfolio of "puts" has transportation (UPS), a restaurant (RRGB), an investment firm (MORN), and one I haven't revealed that I think benefitted from last year's pandemic housing boom.  Half are from business I expect drops off this year, and half just overpriced at the moment.

What other areas would be really high during the pandemic, but collapse afterwards?

ChpBstrd

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Re: Pandemic boosted stocks
« Reply #17 on: March 11, 2021, 11:59:11 AM »
What other areas would be really high during the pandemic, but collapse afterwards?

Zoom Video Communications (ZM) was a pandemic darling stock, but it has also become the service everyone hates. Some of their subscriptions will not be renewed later this year as physical offices repopulate. The stock has been falling since the first effective vaccines were announced. Other customers will defect to Microsoft Teams, Facebook, FaceTime, and a rapidly expanding field of new and innovative competitors. For an overview of what's out there in the next generation of meeting apps, check out the links below.

https://www.meetup.com/blog/virtual-gathering-tools-for-your-next-online-event/?utm_medium=email&utm_source=braze_adhoc&utm_campaign=mmrk_orgeng_org_newsletter_03112021&utm_term=newsletter&utm_content=lp_blog

https://immersive.ly/best-vr-apps-productive-remote-meetings/

https://hartfordrents.com/blog/virtual-reality-meeting-apps/

All these services may be technically and ergonomically superior to Zoom's product. I don't see how Zoom avoids the fate of MySpace or Yahoo search, but that might take a couple of years to unfold. In the meantime, the forward PE ratio of 92 will be hard to justify when sales growth goes negative and the leadership position is lost. Spatial appears to be the early leader, but we retail peons cannot invest in it.


MustacheAndaHalf

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Re: Pandemic boosted stocks
« Reply #18 on: March 12, 2021, 06:09:14 AM »
I've read that forward P/E is an estimate, so an educated guess but still a guess.  Morningstar is showing Zoom as a 158 P/E now, and a 95 forward P/E estimate.
https://www.morningstar.com/stocks/xnas/zm/valuation

The positive case for Zoom is business customers, who view it as cheaper than traveling.  Those same businesses know every business started using Zoom in 2020, so they can depend on connecting to other businesses over Zoom.  Most people at work might not have a choice of using Zoom or another product, if the company decides what people use.  New businesses might see what existing businesses use, and become Zoom customers.
Counterpoint: Would a business that didn't need Zoom in 2020 start using it in 2021?

But their numbers require really high growth to sustain the price.  The 158 P/E is staggering, and hard to ignore.  And that's before considering their business won't grow as fast in 2021, as the recovery unfolds.  Inflation has spiked a few times recently, and if that continues, high P/E stocks get hurt the worst by it.
Counterpoint: People chasing past performance might try joining Zoom's 3x performance; inflation might be calmer than feared.