If an investment in a growth stock works out, you only need to allocate a small amount. If it doesn't, you would only want to have risked a small amount. If you're seeking growth, and have $2,000 of investable cash looking for a home right now, beaten-down names shift the risk/reward more in your favor.
Growth stocks are typically volatile, giving investors more chances to buy the dip without waiting for a general market downturn. Investors should look at these two names from different sectors that are significantly underperforming both the S&P 500 and the more growth-oriented Nasdaq composite indexes in 2021.
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Peloton: Riding in an ecosystem
Connected home-fitness leader Peloton Interactive (PTON 9.71%) jumped into the spotlight last year when people shifted from gym visits to at-home activities. Its popular products resulted in explosive sales growth, and the stock price followed, rising more than 430% in 2020.
But while sales continued to soar in 2021, the share price hasn't followed. In the six months ended June 30, 2021, Peloton's total revenue jumped 94.3% compared to the same period in 2020, while the stock is down 30% year to date. That comes as the overall market is having a strong year. Peloton trades on the Nasdaq composite index, which at recent levels is more than 17% higher so far in 2021.
Peloton stock has dropped for several reasons. Many market watchers decided to shift away from what were considered "stay-at-home" stocks, betting that an economic reopening would favor other sectors. The company also was forced to recall its treadmill product due to a safety issue. That recall contributed to a sequential quarterly reduction in sales in its most recent fourth quarter of fiscal 2021 that ended June 30. Total revenue of $937 million was down 25% versus the prior quarter ended March 31, 2021. But it was still up 54% year over year.
Long-term strategy
But what some investors may be missing is that Peloton isn't just building an exercise equipment company. In fact, you don't even need to buy the equipment to subscribe to one version of the app, which may work better for some users. But owning the equipment and/or a subscription makes you part of the Peloton ecosystem. It connects fitness enthusiasts with both friends and strangers, and this connectivity helps increase interest and motivation to exercise. The company also just announced the launch of Peloton Apparel, a private-label line of fitness clothing that is another way to highlight its brand.
Peloton management announced a $400 reduction in the price of its bike recently, which points to a strategy of growing the ecosystem by making its products more affordable. Indeed, subscription revenue grew 132% in the most recent quarter year over year and made up 30% of total revenue. Subscription revenue provides higher gross profit margin, giving management confidence to predict a 700 basis point increase in that metric over the course of the next year. That strategy should help move the company to consistent profitability, making the recent drop in share price a good long-term buying opportunity.
Image source: ChargePoint Holdings.
ChargePoint: Ready to drive forward
Another growth stock that has seen its shares discounted in 2021 is electric vehicle (EV) charging network company ChargePoint Holdings (CHPT 4.05%). The company operates in a crowded field. Many investors bought in with promises of exponential growth ahead.
Some of these companies aren't living up to expectations, and the entire sector is well off share price levels seen at the peaks over the last year. But ChargePoint has a long history and has shown recent progress toward its growth goals. The company has been in business for about 14 years, and it says that over 3 billion electric miles have been driven on its charging network.
It also believes that is just the beginning. Prior to going public earlier this year, ChargePoint told prospective investors it believed its revenue growth would accelerate from about $135 million in 2020 to almost $1 billion by 2024 and to more than $2 billion in 2026. In its second-quarter fiscal 2022 update earlier this month, the company included a 15% boost to this calendar year's revenue guidance at the midpoint of the range. That's a good start to its public life. But the stock is still down almost 50% year to date.
A ChargePoint network account gives customers access to more than 130,000 places in North America and Europe in which to charge their EVs. It is the leading North American Level 2 charging network, which uses 240-volt power. It also has more than 2,000 publicly available fast-charging stations and is growing its network in European countries.
But even with the stock down this year, ChargePoint still trades at high levels. The company hasn't yet produced profits, and it trades at a price-to-sales (P/S) ratio of 29 based on the new 2021 sales guidance. But for someone looking to put some cash into a speculative investment in a growing sector, ChargePoint shares come at a discount compared to their price at the start of the year.
