Times change, and so do market fortunes. The once high-flying stars of the software and services sector have seen a dramatic fall from grace. Zoom Video Communications and Snowflake, the darlings of the cloud computing boom in 2021, have seen their valuations collapse.
Zoom's stock price, which once soared to nearly $588 per share in 2021, now hovers around $95, representing a decline of over 80% from its peak. In 2024, it even plummeted to a low of $55, a staggering drop of more than 90% from its all-time high. Despite the company achieving genuine growth over the past four years, the market now views it as an ordinary company, with its valuation suffering a severe contraction.
Similarly, cloud-computing concept stock Snowflake has been grounded. After going public at $120 per share in 2020, its stock surged to a record high of $429 in 2021. However, by 2024, it had fallen to a low of $107, a 75% drop from its peak. Even after a year-long rebound, the stock remains approximately 60% below its highest point. While Snowflake's revenue has multiplied by 12 times over the past four years, it has never turned a profit, and its losses have continued to widen.
In stark contrast, many traditional companies have reached new all-time highs over the past five years. Stocks like Walmart, Procter & Gamble, Philip Morris, Bank of America, ExxonMobil, ConocoPhillips, and Deere have demonstrated steady upward momentum. This highlights that the most hyped emerging companies rarely become the next Microsoft, while often-overlooked traditional stocks can deliver consistent returns. The same narrative repeats in capital markets, where time proves to be the ultimate judge. For long-term investors, the two most critical questions remain: what to buy and at what price.
The core issue lies in valuation compression and persistent losses. Zoom's fundamental performance has not been disappointing. Since its IPO in 2019, its annual revenue grew 6.5 times to $4.665 billion in 2024, while its earnings per share surged 35-fold to $3.28. However, its valuation multiple has collapsed. At its peak in 2021, Zoom traded at a price-to-earnings (P/E) ratio of 238 times. That ratio has now shrunk to just 17 times, reflecting the market's reassessment of its growth prospects.
Snowflake, meanwhile, has shown steady revenue growth since its IPO but has failed to achieve profitability. Its annual loss expanded from $348.5 million in 2019 to $1.286 billion in 2024. During 2020 and 2021, cloud computing and the SaaS (Software-as-a-Service) model were the dominant investment themes. This model, which shifts software expenditure from capital expense to operational expense, was seen as disruptive. However, a few years later, the disruptors are now being challenged. The software and services sector has faced significant pressure this year, with even giants like Oracle and Microsoft declining over 15%, and smaller companies falling nearly 40%. Investors are now questioning if the traditional software model is under threat from AI, which could compress pricing power and disrupt the subscription-based revenue growth that fueled the sector for the past decade.
The cases of Zoom and Snowflake are instructive. Both were phenomenal market debuts—Zoom was the fourth-largest U.S. IPO by market cap in 2019, and Snowflake was the largest in 2020. Their success sparked media frenzy and drove rallies in comparable stocks in Asian markets. Yet, Zoom's valuation crumbled from over 200 times earnings to 17 times amid increased competition and sector headwinds. Snowflake never achieved profitability, leading even Berkshire Hathaway, which participated in its IPO at the issue price, to completely exit its position in the second quarter of 2024. This suggests Berkshire likely saw little to no profit, or even a small loss, on its four-year investment.
Notably, traditional companies in sectors like energy and consumer staples, such as ConocoPhillips, Procter & Gamble, Walmart, and Coca-Cola, have repeatedly hit new highs over the past five years. For instance, after falling 36% in 2020 to a low of $20.84, ConocoPhillips offered a dynamic dividend yield of 9.36% in 2021. Its stock has since surged nearly fivefold from its low point.
The Davis family, creators of an investing dynasty, have long emphasized that successful investing boils down to two fundamental questions: which companies to buy and what price to pay. A key principle of the "Davis Double Play" was to never overpay, instead buying reliable growth stocks at reasonable prices—specifically companies with P/E ratios below 15 and growth rates between 7% and 15%. They consistently avoided technology stocks, believing that even fairly valued tech companies were vulnerable to disruption and faced an uncertain path to sustainable profitability.