Markets

3 Growth Stocks That Could Be Headed for Trouble Once the Pandemic Ends

The end of the pandemic looks to finally be in sight as the number of new cases of COVID-19 in the U.S. has fallen to lows not seen in over a year. And the numbers will likely continue to fall as more people receive vaccines. While some companies will do better now as things return to normal, there are others that could struggle as pandemic-driven trends slow down.

Three stocks you may want to consider selling before that happens include Hologic (NASDAQ: HOLX), Zoom Video Communications (NASDAQ: ZM), and Costco (NASDAQ: COST).

A team reviewing numbers at an online meeting.

Image source: Getty Images.

1. Hologic

The pandemic has led to a surge in revenue for Hologic. But with COVID testing volumes likely to decline, investors have been unloading the healthcare stock -- it is down 16% in 2021 while the S&P 500 has risen by more than 12%. When the company released its second-quarter numbers on April 28, sales for the period ending March 27 were still strong at $1.5 billion -- more than double the $756 million it reported in the same quarter last year. But what's fueling that growth is its molecular diagnostics segment, which includes COVID-19 testing. That area of its business grew 391% year over year. And that has been primarily due to the company's COVID-19 assays.

The company is anticipating a drop in third-quarter revenue to no more than $1.07 billion. But what's troubling is that still includes a "significant outlook for COVID test revenue." While the actual number isn't noted, it suggests Hologic is still banking on COVID-19 testing volumes to give it a big boost next quarter. But even if that is the case, sooner or later the well will dry up. And there are some serious concerns with the business afterward, including where its growth will come from -- sales from its breast health business were up 9.3% in Q2 and gynecology-related revenue rose by 8.4%. While these are decent numbers, investors shouldn't ignore that Hologic has been extremely busy on the M&A front, and acquisitions are likely inflating the company's top line. Since August 2019, the company has completed eight acquisitions. Not only could it be a challenge to keep costs down amid all those integrations, but it also makes it difficult to decipher how strong Hologic's organic growth is.

Although the stock trades at a relatively modest eight times earnings, my concern is that profitability may not be a guarantee moving forward. Prior to COVID-19, Hologic incurred losses for fiscal years 2018 and 2019.And without testing volumes to help strengthen its top line plus the potential inefficiencies that will likely exist from all of its recent acquisitions, the company could again fall back into the red.

With so many question marks around its business, Hologic is a stock that poses significant risks. Investors will have to make sure that they're aware of them and can stomach the downs if they have conviction in the stock.

2. Zoom

Zoom's business is still showing strength as the company is coming off yet another impressive quarter. On June 1, it reported revenue of $956 million for the period ending April 30, which was up 191% year over year. That's an impressive percentage, but investors should also remember that this would still have been during the early stages of the pandemic last year. And while more businesses are certainly using videoconferencing, generating this type of sales growth isn't sustainable. There are also more companies offering similar services, including Alphabet's Google Meet and Microsoft Teams. Microsoft also recently added videoconferencing right within Windows 10.

Next quarter, Zoom projects its sales will come in between $985 million and $990 million. That would put its quarter-over-quarter growth at just 3.6% on the high end of that estimate. That's considerably lower than in previous periods:

Period Revenue Sequential Growth
Q2 2022 $990 million (projected) 3.6%
Q1 2022 $956 million 8.4%
Q4 2021 $882 million 13.5%
Q3 2021 $777 million 17%
Q2 2021 $664 million 102.4%

Source: Company filings.

Trading at a price-to-earnings (P/E) ratio of 117, Zoom's stock looks astronomical when compared to the average tech stock in the Technology Select Sector SPDR Fund, which trades at a P/E of just 34. And if the company's sales growth continues to slow down, a sell-off of its shares could be inevitable. Year to date, the stock is up just 1%.

3. Costco

Costco is a solid stock to own for long-term investors but its inflated value makes it vulnerable to a correction. With a P/E of 36, this isn't cheap for a retail stock; Walmart trades at 33 times its profits and Target is even cheaper at a multiple of 19.

The company has benefited from a surge in pandemic-related buying over the past year and that too is starting to slow down. E-commerce sales, which have been strong for many companies amid lockdowns, were up 12% on a comparative basis for the four-week period ending May 30. A year ago, that percentage was over 106%.

While store sales overall are still strong and Costco reported $45 billion in revenue for the 12-week period ending May 9, which was up 21% year over year, that could come down as consumers have more options to shop now that lockdowns and restrictions look like they may be over for good. Historically, Costco has generated much more modest growth numbers; its revenue in fiscal 2019 totaled $153 billion and rose by just 7.9%, and that's more of what I would expect from it moving forward. However, at that type of growth investors likely won't be as bullish on this stock. Like Zoom, it has been holding steady up around 1% this year but I wouldn't be surprised to see a steep drop in the months to come.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Costco Wholesale, Microsoft, and Zoom Video Communications. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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