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2 Growth Stocks Getting Slowed by Supply Chain Issues

By Parkev Tatevosian, CFA – Updated Sep 3, 2021 at 2:12PM

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The coronavirus pandemic continues to exacerbate bottlenecks in the supply chain.

One of the side effects of the long-running coronavirus pandemic has been the supply chain disruption it's causing. For instance, an outbreak at a manufacturing facility can send the whole staff home to quarantine. The same has been true at critically important shipping ports. 

Then there are the situations where some employees (especially those who are still not vaccinated) aren't willing to work in crowded spaces while there is a deadly virus spreading. Some businesses have been boosting pay or offer bonuses to get employees to show up to work or face a worker shortage. 

While there have been over 5 billion doses of a vaccine against COVID-19 administered in an effort to slow the virus's spread, there is still no end in sight for many pandemic-related supply chain bottlenecks. As a result, several growth stocks are getting slowed down. Let's talk about two of them. 

Two kids watching tv.

Image source: Getty Images.

1. Peloton Interactive

Peloton Interactive (PTON 0.30%) manufactures and sells connected exercise equipment that can be used at home. Interest in the company's products surged at the pandemic onset as many people looked for ways to cope with pandemic-related lockdowns. The spike in demand combined with shipping issues from manufacturing plants in China and elsewhere meant Peloton had difficulty keeping up. At one point in 2020, order backlogs were so high it was taking 10 weeks for customers to receive ordered products, far above the usual one to three weeks.

Customer complaints became numerous enough that management resorted to spending an extra $100 million and switch some freighter shipping to more expensive airplane shipping. The supply chain issues even led management to pause advertising products because it didn't want to exacerbate the supply problem.

That added cost ate into Peloton's bottom line until it could help mitigate the problem. Peloton spent $420 million buying a U.S. exercise equipment manufacturer to add capacity, and it announced plans to build a factory in the U.S. The moves will reduce reliance on contract manufacturers overseas but they will take time to get up and running and create short-term expenses.

Peloton's supply and demand are better balanced now, but supply chain issues are forecast to continue to slow Peloton's growth in the short term. 

2. Roku

Roku (ROKU -0.76%) is a pioneer in bringing all sorts of streaming content to consumers' TVs. The company sells hardware devices that help connect TVs to streaming services. Additionally, Roku licenses its software to TV manufacturers that make this streaming provider platform the default operating system. 

From the second quarter of 2020 to the first quarter of 2021, Roku was selling its players at a decent gross profit. That all changed in Q2 2021 when tight component supply conditions and shipping constraints increased the players' production costs faster than Roku management expected. Management chose to absorb the higher costs rather than pass it on to customers and lost $6.7 million in gross profit just from second-quarter player sales.

The company has always subsidized the players' production costs in order to sell more and make up the revenue through advertising on its streaming platform. But this was more than it planned for and it hurt the company's growth. The issues are still being dealt with and, as a result, Roku isn't growing as fast as management (and some investors) would like. 

Investor takeaway 

Supply chain issues will likely continue to hamper Peloton's and Roku's growth ambitions as long as the pandemic persists. Management for each company is working to find solutions but the teams are still dealing with higher costs for now.

At the pandemic onset, these two growth stocks thrived as more consumers were staying at home. But as economies reopen and people have more options to spend their time and money on. This too could have some effect on the demand for Peloton and Roku products and services. Meanwhile, the challenges of doing business in a pandemic remain. 

Investors should expect these challenges to increase the short-term volatility in sales, profits, and stock prices for these two companies. Interested investors with a long-term outlook should put Peloton and Roku stocks on their watch lists for the potential to buy them if prices, which are down 15% and 18% in the last month, drop further.   

Parkev Tatevosian owns shares of Peloton Interactive and Roku. The Motley Fool owns shares of and recommends Peloton Interactive and Roku. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Roku Stock Quote
$56.08 (-0.76%) $0.43
Peloton Interactive Stock Quote
Peloton Interactive
$10.06 (0.30%) $0.03

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