When it comes to growth stocks, the market can become unkind quite quickly if the company fails to live up to lofty expectations. These types of companies experience rapid top-line advances, and may also have strong bottom-line growth.
However, these stocks also tend to trade at high valuations. If growth falters, the price can crater. Two such companies that have had major drops are Peloton Interactive (PTON -0.98%) and Chewy (CHWY 1.92%). These two have fallen by more than 50% over the last year.
With a fall from grace, it's time to look to see if this drop is telling you prospects have weakened or if this represents a buying opportunity.
Image source: Getty Images.
1. Peloton Interactive
Over the last year, Peloton Interactive's share price has dropped by 79%. Once a Wall Street darling, the company's revenue took off during the pandemic as demand for its fitness machines and subscription-based fitness classes surged.
Peloton's fiscal 2020 revenue nearly doubled to $1.8 billion, and then jumped to $4 billion the following year. However, the red ink continued with the company losing $189 million compared to $195.6 million two years earlier. The company's fiscal year ends on June 30.
Meanwhile, demand for its products appears to have slowed for a variety of reasons, including increased competition. For instance, Lululemon Athletica (NASDAQ: LULU) offers its Mirror product, and NordicTrack has a line of exercise equipment. Additionally, people are tired of staying home, which may also be a factor.
In the latest quarter, which ended on Dec. 31, 2021, revenue was $1.1 billion, with growth slowing to 6%. Peloton lost $439.4 million after posting a $63.6 million profit a year ago.
In response, management announced a plan to slash costs by at least $800 million. This may help the bottom line in the short run, but it doesn't address the fundamental problem of lower demand.
After speculation that Peloton could get sold and produce a windfall for shareholders, new CEO Barry McCarthy appeared to put that talk to rest.
2. Chewy
Chewy's stock has also had a rough year, down 56%. But this comes on the heels of a 158% increase in 2020. Demand for its products rose as people adopted pets in the early days of the pandemic.
The online retailer of pet food, prescriptions, and other supplies has experienced rapid growth. For fiscal 2019, sales grew by better than 37% to $4.8 billion, and more than 47% the following year to $7.1 billion. Meanwhile, its loss narrowed from $267.9 million to $92.5 million during that time. Chewy's fiscal year ends in late January or early February.
People's love of their pets drives spending growth, with the industry growing by about 5% a year. Even in bad economic times, owners typically continue to spend money, with pet spending up 12% from 2008 to 2010 despite overall consumer expenditures falling during that economic downturn.
Aside from being in a growing industry, Chewy's strong online presence and focus on customer service put it in a good competitive position. For the first nine months of this year, sales grew by 27.4% to $6.5 billion. Although the company remains unprofitable, its loss significantly narrowed to $10.2 million from $113.5 million.
It is always wise to tread carefully when a stock has fallen by a significant amount. In the case of Peloton, I think it's a good idea for investors to stay away given the slowing demand and competition. But Chewy's sales, albeit slowing from a year ago, still show nice growth. Keeping expenses in check, it's not hard to envision the company becoming profitable soon. Hence, Chewy's stock, selling at 2.6 times sales compared to over six times a year ago, looks like a bargain at this level.
