After a brutal 2021, these two stocks are looking forward to 2022 and will attempt to reinvigorate their operations and bring back share price appreciation. While the tech-focused growth stock sell-off has undoubtedly not helped either of these stocks, the underlying megatrends that these two companies benefit from look more robust than ever.
Thanks to the strength of these trends and the beating these companies' share prices have taken, Peloton Interactive (NASDAQ: PTON) and C3.ai (NYSE: AI) look poised to rebound in 2022 -- and potentially become 10x investments over the long term.
Aiming "to connect the world through fitness, empowering people to be the best version of themselves anywhere, anytime," at-home fitness specialist Peloton has seen its stock drop nearly 80% from its all-time highs in 2021. As devastating as this drop has felt for investors, the stock essentially trades at the same price as it did in April 2020, just after the pandemic started -- leaving it with a market capitalization, or company price stage of $11 billion.
This fact helps show just how excited the markets were over Peloton's suite of pandemic-benefiting products, primarily its famous connected fitness bikes. Furthermore, since April 2020, the company has grown its connected fitness subscriptions by 129%.
With 2.5 million connected fitness subscriptions, this high-margin business continues to shine amid the company's hardware struggles related to recalls, lowered pricing, and tough year-over-year comps. The company posted an overall gross profit margin of 33% in the first quarter of fiscal year 2022 (ended Sept. 30, 2021), with the subscription unit's margin ringing in at 67%, indicating that this is Peloton's long-term path toward profitability.
Furthermore, according to Comparably, Peloton's Bike and Tread products are still truly beloved by its customers, recording a Net Promoter Score (NPS) of 70 as of year-end 2021. NPS ranges from negative 100 to 100, with a positive score meaning that most customers are promoters of the company's product.
Thanks to this high NPS, I fully support Peloton's decision to lower its Bike price to $1,495, especially as it has shown the ability to keep new customers in its subscription ecosystem, posting a minuscule 0.8% monthly churn rate in Q1.
Due to this customer loyalty and the subscription business's immense long-term value, I believe Peloton's price-to-gross profit ratio of 9 places it in the "too cheap to ignore" bin of growth stocks. Consider that Apple, the largest company in the world, has a price-to-gross profit of 19, and it is clear to see that Peloton's future growth potential trades at a huge discount today.
Fueled by its mission of "helping companies solve the previously unsolvable," C3.ai trades with a market capitalization of $3 billion and aims to "significantly reduce the effort and complexity of the Enterprise Artificial Intelligence software engineering problem."
In simpler terms, C3.ai's software-as-a-service (SaaS) applications help enable things such as predictive analytics and the Internet of Things to exist functionally.
While the company's operations can probably make most investors' eyes glaze over, ignoring this innovative company could be to our portfolio's detriment. Altogether, C3.ai's sales come from four groups of artificial intelligence (AI)-driven software solutions:
- C3 AI Suite: data integration and management, operational and security, etc.
- C3 AI Applications: cross-industry and industry-specific applications.
- Cross-industry: inventory optimization, supply chain network risk, fraud detection, etc.
- Industry-specific: financial, manufacturing, utilities, oil and gas, and aerospace and defense.
- C3 AI Ex Machina: no-code solution enabling AI models in any business without formal AI training.
- C3 AI Customer Relationship Management (CRM): sales, customer service, and marketing.
All in all, this somewhat overwhelming list of solutions is what makes C3.ai unique -- it can make sense of and help businesses capitalize on all of these areas and across nearly endless industries.
However, one thing to note regarding the company's revenue sources is that as of fiscal year-end 2021, 31% and 37% of total sales came from Baker Hughes and Engie, oil and utility industry experts, respectively. Thanks to C3.ai's vast array of software and serviceable industries, this number should only decline as the company grows. Yet should it lose one of these customers, it would send shockwaves through its finances.
Posting accelerating year-over-year revenue growth of 41% for the second quarter of fiscal 2022, ended Oct. 31, 2021, the company now trades at only 22 times its gross profit, placing it on the cheaper end of most high-flying growth stocks. As the digital transformation continues, C3.ai's software solutions look beautifully positioned to capture new business moving forward as companies look to utilize artificial intelligence to its fullest extent within their operations.