5 companies that made the best of a bad year

In a year that gave new meaning to the term “unprecedented times,” businesses were forced to be flexible to stay afloat.

As we embraced stretch pants as workwear, companies like Lululemon benefited from the new definition of business casual. And as we began to prefer pizza delivery to dining out, companies like Uber had to focus on transporting entertainment to people’s homes, rather than transporting people from their homes to the entertainment.

The coronavirus pandemic has sped up some consumer trends that were already taking hold: everything from remote working to virtual doctors’ appointments. Companies that embraced these consumer trends tended to fare better in 2020, while businesses that resisted them tended to struggle. In many cases, success in 2020 meant repositioning long-term goals to align with these consumer trends—not just finding quick fixes to revenue gaps.

Here are a few companies whose approaches worked in 2020—or who made 2020 work for them.

Airbnb (ABNB)

• Morningstar Rating: 1 Star
• Morningstar Economic Moat Rating: Narrow
• Fair Value Estimate (as of Dec. 31, 2020): US$60

The emergence of the coronavirus pandemic decimated Airbnb bookings: According to AirDNA, US reservations made in the month of March declined 50 per cent year over year; reservations made in the month of April declined about 62 per cent. These numbers aren’t surprising: Many people weren’t comfortable with air travel or making numerous stops en route to a destination. Additionally, they didn’t want to share space with hosts or other parties.

Still, the homebound lifestyle meant that many people craved a change of scenery, so Airbnb pivoted to focusing on local stays, or “staycations.” The company refined its algorithm to prioritise nearby stays, and focused on offering social distancing-friendly homes, like cabins, cottages, and beach houses over urban apartments.

Airbnb reported that more than half of all bookings made in August were for stays within 300 miles of the guest’s origin. It’s also reported that 60 per cent of guests were working or studying during long-term Airbnb stays (defined as 28 days or longer), indicating that people used Airbnb to find more pleasant or socially distant locations to stay in while working—not just for a traditional vacation. After that massive decline in reservations in March and April, AirDNA reported that Airbnb returned to year-over-year bookings growth by mid-May and US reservations made in June were up 21 per cent year over year.

Following Airbnb’s IPO in December, we initiated coverage with a $60 fair value estimate. All things considered, we think Airbnb is well-positioned to succeed in 2021, barring extended travel shutdowns, but also note that it is currently trading well above fair value. Morningstar equity analyst Dan Wasiolek says, however, that “we believe Airbnb has achieved a critical-mass network advantage in alternative accommodations…We see its network position supported by further expansion into emerging markets.”

Disney (DIS)

• Morningstar Rating: 2 Stars
• Morningstar Economic Moat Rating: Wide
• Fair Value Estimate (as of Dec. 31, 2020): US$140

Though Disney’s portfolio of offerings is relatively diverse, nearly all areas of the company suffered the consequences of 2020. For instance, its movie releases were postponed, its theme parks closed for nearly four months and its cruise line canceled reservations through at least March 2021.

But one area of Disney’s business proved more popular than ever: streaming services. The company reported that its namesake Disney+, along with its owned platforms of Hulu and ESPN Plus, had reached a combined total of 137 million subscribers by December. This owed partially to the continued stay-at-home mindset, which meant increased screen time for many; plus, with movie theaters either at reduced capacity or closed entirely, Disney had to pivot to releasing new films via streaming.

Disney leaned into this shift. In October, the company announced a restructuring to focus its efforts and investments on streaming services. The company said it plans to release a couple of films via streaming in 2021, and its television calendar includes releases from iconic, high-grossing franchises like Marvel and Star Wars. This strategy helps Disney+ compete with other high-market-share movie studios and gives it a leg up against other, less-diversified competitors in spaces like amusement parks, cruise lines, and novelty retail stores.

We place Disney at a fair value estimate of $140. While we project that the nonentertainment aspects of the company will continue to suffer through 2021, Morningstar equity analyst Neil Macker says, “We expect the unique content on [streaming services] will provide the firm with a softer landing than its peers.”

Walmart (WMT)

• Morningstar Rating: 2 Stars
• Morningstar Economic Moat Rating: Wide
• Fair Value Estimate (as of Dec. 31, 2020): US$124

Walmart’s revenue was relatively strong over the course of 2020, but as the pandemic continues and consumer comfort levels with in-person shopping remain volatile, the company had to get ahead of the shift toward online shopping to make sure its business levels remain stable.

Walmart has offered delivery services and in-store pickup for a few years now. In September, the company accelerated its adoption of more extensive e-commerce offerings with Walmart Plus, a membership program that offers delivery services and discounts for certain in-person items like gas.

We don’t expect Walmart Plus will necessarily help the company reach new customers, but it will help existing customers continue to see it as a viable option when they’re not able to shop in person. The success of Walmart Plus, clearly meant as a more affordable competitor to Amazon Prime, will be partially determined by its ability to interest consumers in buying its more expensive products online, rather than just groceries or other relatively inexpensive items that they tend to associate with Walmart.

Additionally, in order to commit the necessary resources to a strong digital transformation in its core markets, Walmart has announced changes to its international strategy, selling stores in Japan, Argentina, and the United Kingdom.

We place Walmart at a fair value estimate of $124. We believe that this move toward e-commerce platforms is the best bet for Walmart, as we don’t expect its brick-and-mortar business to be a strong growth driver going forward. Morningstar equity analyst Zain Akbari writes, “We view [Walmart’s] efforts positively and suspect it has built an infrastructure that should support digital percentage growth well into the double digits for years to come.”

Uber (UBER)

• Morningstar Rating: 3 Stars
• Morningstar Economic Moat Rating: Narrow
• Fair Value Estimate (as of Dec. 31, 2020): US$61

The emergence of the coronavirus pandemic also shattered business in Uber’s ride-hailing division, as people quarantined at home or curbed traveling in shared space. The company reported that as the pandemic took hold, rides were down 80 per cent year over year in April, and the second quarter saw a 73 per cent decline in revenue year over year. Separately, the year saw increased regulation around the operations of ride-sharing companies, which could mean increased labor costs for Uber’s drivers.

But the homebound lifestyle also naturally leant itself to opportunity in another part of Uber’s business: food delivery. In the second quarter of 2020, gross bookings in the UberEats division were up 113 per cent year over year.

This shift led Uber to focus its efforts on expanding this business division. It launched a partnership with Latin American grocery delivery service Cornershop (which it had already planned to take a majority stake in before the pandemic). This move paves the way for strong international expansion for Uber. Uber also announced a deal to acquire food delivery provider Postmates, which is expected to close early this year and land Uber with more than 30 per cent market share.

Uber is still expected to post a loss for 2020, but we think it will recover sooner than it would have if the firm had not focused on delivery. We think the interest in delivery services is not unique to 2020 but will remain in demand after the pandemic effect fades, mainly because people have come to appreciate its convenience.

We place Uber at a fair value estimate of $61. We believe delivery will continue to be one of the company’s main drivers, but because of broader scrutiny for ride-sharing platforms, its future remains relatively uncertain. Morningstar equity analyst Ali Mogharabi notes, “[We expect] Uber to generate full-year positive adjusted EBITDA and operating income in 2022 and 2023, respectively; both a year earlier than we had previously assumed.”

Lululemon (LULU)

• Morningstar Rating: 1 Star
• Morningstar Economic Moat Rating: Narrow
• Fair Value Estimate (as of Dec. 31, 2020): US$155

With many businesses moving toward remote work in March, more people swapped their business attire for more casual and comfortable clothes. Though NPD Group reported that overall apparel sales were down 34 per cent between March and July year over year, athleisure sales ticked up slightly year over year, a trend that was likely attributable to canceled events and increased time at home.

Lululemon’s results aligned with this consumer trend: As the pandemic took hold in the US in the second quarter of 2020, the company reported a total net revenue increase of 2 per cent; in the third quarter, it reported a 17 per cent decrease in net store revenue year over year and a 94 per cent increase in direct-to-consumer net revenue year over year, for a total net revenue increase of 22 per cent.

As part of its strategy to thrive during the stay-at-home era, Lululemon acquired—and launched an aggressive marketing plan for—Mirror, an interactive fitness device that streams workout classes through a video feed onto the customer’s wall space. Though Lululemon has prevailed in the high-end athleisure space thus far, the space is crowded, and the acquisition of Mirror helps diversify the company beyond fitness apparel into the broader fitness space. The company’s decision helps it take advantage of people avoiding gyms and group workout classes in favor of working out from home—a consumer trend that industry research suggests may well stick around in a post-pandemic world.

Additionally, Mirror is in a position to compete with at-home fitness giants like Peloton, as the majority of its business already occurs online.

We place Lululemon at a fair value estimate of $155. Though it can benefit from the long-term work-from-home consumer trend, we believe it has simply pulled demand forward and, as a result, been overvalued. Morningstar equity analyst David Swartz notes, “We think Lululemon will need growth from some crowded categories, such as footwear, personal hygiene, and men’s apparel, where its future is uncertain. The firm will need to expand its customer base and product assortment to meet our view of a doubling of sales between 2019 and 2025.”

The future of the companies that adapted to consumer trends in 2020

In 2020, investors were well-rewarded for investing in companies that were agile enough to shift their strategies to align with the consumer trends that the pandemic instigated or accelerated.

However, in our view, other than Uber (which we rate at 3-stars), investors may have overextrapolated the long-term earnings growth potential of these companies, as we rate the others at either 1- or 2- stars.

Emelia Fredlick is an editor, content development for Morningstar based in Chicago.