The novel coronavirus pandemic has taken a devastating toll on the United States, responsible for nearly 10,000 deaths so far. Economically, social distancing measures enacted by cities, states, and the federal government have shut down many businesses and led to millions of unemployment claims. The S&P 500 index is down roughly 23% from its 52-week high.
Not every stock has been hammered by the crisis. Investors are betting certain companies are poised to benefit from stay-at-home orders. Some of those bets make sense. Some don't. Investing in Peloton Interactive (NASDAQ:PTON) and Blue Apron (NYSE:APRN) may seem like a good idea, but they're two stocks that should be avoided.
Losing money during the best of times
When the pandemic-driven market sell-off began, shares of Peloton sank like most other stocks. At its low, Peloton stock had been more than cut in half from its 52-week high.
The narrative around the seller of pricey exercise bikes changed in mid-March. As nonessential businesses around the country were forced to close as governments enacted social distancing measures to slow the spread of the virus, it became clear that people who normally visit the gym would be forced to workout at home. That would seem to benefit a company like Peloton.
This story fueled a rebound for the stock. Shares of Peloton are now up about 60% from their low as investors bet consumers would be clamoring for the company's $2,245 exercise bikes in the era of social distancing. And all those new Peloton customers would likely shell out for the company's $39 monthly subscription, which provides live and on-demand video classes.
Peloton may very well enjoy a short-term boost in demand, but that's no reason to buy the stock. Before the pandemic, Peloton was practically lighting money on fire selling ultra-expensive exercise equipment and pricey subscription plans. In the quarter ending on Dec. 31, sales and marketing costs ate up 34% of revenue and most of the company's gross profit. Peloton posted an operating loss of $61.5 million, worse than the prior-year period.
One short-term problem for Peloton: The company has been forced to stop producing live cycling and running classes after an employee tested positive for the novel coronavirus. Production will be paused through April 30, so subscribers won't have access to new content for the rest of this month.
Longer term, a recession probably won't treat a luxury exercise equipment company particularly well. A perfect storm for Peloton would be tough economy, with high rates of unemployment and depressed consumer demand, at the same time as social distancing measures begin to be eased, allowing people to visit gyms and take in-person classes. A few months down the road, that scenario is certainly possible.
During normal times, a company that can't make money selling $2,000 exercise bikes is one to avoid. During a recession, that's doubly true.
Meal kits are still a bad idea
Meal kit pioneer Blue Apron was circling the drain before the pandemic. Revenue was plummeting, losses were piling up, and customers were fleeing. During 2019, sales were down 32% to $454.9 million, and the company posted a net loss of $61.1 million. Blue Apron had 351,000 customers at the end of the year, down 37% from the end of 2018.
Blue Apron has a fundamental problem: Meal kits just aren't very appealing. The company has struggled with retaining customers, and for good reason. For the standard two-person plan, Blue Apron charges $9.99 per serving. That's fast-casual restaurant pricing for something that still needs to be cooked at home, and it's far more expensive than grocery store pricing.
For now, though, Blue Apron is enjoying a temporary resurgence. The pandemic has led to panic buying at grocery stores, and consumers are now more likely to try to avoid stores altogether to reduce risk of catching the virus. Blue Apron has enjoyed a "sharp increase in consumer demand," according to a statement from the CEO. The company is hiring temporary and permanent employees, and it's increasing capacity.
The pandemic does not suddenly make Blue Apron's product make sense. Until the crisis begins to fade, more people may be willing to pay a premium for meal kits to avoid the store. But it won't last. Why would it?
Blue Apron stock is up more than 450% from its 52-week low. If you own it, get out while you can. If you don't, stay far away.