After years of Wall Street being too quick to sell the shares of smaller, fast-growing, tech companies on news that a bigger company is launching a rival product or service, the pendulum might have swung too far in the other direction.
There's arguably something of a "boy who cried wolf" phenomenon at work here. Over the last few years, it has been a common sight to see selloffs among smaller tech firms that are focused on one or two markets -- names that come to mind include Etsy, Roku, Yelp, Wayfair, Pinterest, MercadoLibre, MongoDB, Elastic and Zoom -- on news that a tech giant such as Amazon.com (AMZN) , Facebook (FB) or Alphabet (GOOGL) plans to encroach on its turf.
Every now and then, such a selloff proved justified. For example, those who sold Fitbit in 2015 or 2016 on Apple Watch announcements probably don't regret having done so.
But as the stock charts of many of the aforementioned smaller companies make clear, more often than not fears that a tech leviathan would do serious damage to a smaller-but-more-focused company that claimed a head-start and loyal customers/users proved to be overblown.
For all its broader success, Amazon's craft goods marketplace didn't do much to slow Etsy's growth, its DocumentDB service hasn't kept MongoDB from continuing to record strong growth and its expansion into parts of Latin America hasn't significantly harmed MercadoLibre so far. And for all its success, Facebook's now-shuttered Hobbi app had no impact on Pinterest, and the group video calling features it added to Messenger haven't done much to slow Zoom's momentum.
However, today, with so many of these smaller, focused companies having been bid to the moon, markets seem to be giving little or no consideration to the fact that some of them do face meaningful competition from tech giants and/or other smaller firms.
Consider, for example, how Peloton's (PTON) stock briefly dipped following Apple's (AAPL) unveiling of its Fitness+ service on Sep. 15, but more than recovered its losses within two days and subsequently rallied to new highs, leaving its market cap currently standing at $27 billion.
Or consider how Zoom (ZM) , which has admittedly posted stunning growth rates in recent quarters, has skyrocketed to a $140 billion-plus market cap even though its competitive environment has become a lot tougher than it was in the days when Cisco Systems' (CSCO) Webex was its main rival. Among other things, Microsoft (MSFT) , Google and RingCentral have been overhauling their video offerings, and Slack (WORK) has teamed with Amazon to better support voice/video calling.
One could also bring up how Twilio (TWLO) , which is now worth $35 billion, brushed off Microsoft's Tuesday unveiling of Azure Communications Services, which directly competes against Twilio's offerings. Or how Snowflake (SNOW) was granted a sky-high valuation even by enterprise software standards in spite of the fact that it faces meaningful competition from Amazon, Google and Microsoft's cloud data warehousing services.
In each of these cases, bulls can argue that the company in question offers best-of-breed products and services for at least a portion of its addressable market.
Those who have their hearts set on getting an $1,895 Peloton bike and signing up for its All-Access Membership aren't going to be dissuaded by Fitness+. Many Zoom customers clearly view it as the best video meeting solution on the market, and many users of Snowflake's platform would argue its performance, ease of use, pricing model and/or flexibility make it the best option for the data warehousing needs.
But current multiples -- and the growth expectations implied by them -- loom large here. It would be easier to brush off the arrival of tougher competition for Zoom if its stock was trading below $200, as it was in April and May. At $500 -- a price that leaves Zoom possibly trading for more than 50 times the revenue it will generate in its current fiscal year -- there really isn't any margin of error.
Likewise, with Peloton now valued at more than $25,000 per current subscriber, it's not enough for the company to keep growing its customer base in spite of Fitness+'s arrival, as it quite likely will. Markets are counting on many, many new bikes and subscriptions being sold in the coming years.
In some ways, the indifference that markets have been showing to the arrival of new or tougher competition for many high-multiple tech companies is one more example of how (amid a major spike in retail trading activity) markets have become desensitized to risk for favored names. Only time will tell how long such a mood lasts, but it's best not to assume it will last forever.