What happened
Shares of Netflix (NFLX -9.09%), Peloton (PTON -0.98%), and DraftKings (DKNG -2.31%) were all sinking Tuesday, down 4.6%, 6.8%, and 4.5%, respectively, as of 1:14 p.m. ET.
There wasn't anything in the way of company-specific news from any of them. However, each is a former consumer discretionary darling that thrived during the more intense periods of the pandemic. But with a new report out suggesting that home price growth is accelerating, investors may think that consumers will soon be dialing back their spending on these sorts of luxuries as their wallets are further squeezed.
So what
On Tuesday morning, the latest report on the S&P CoreLogic Case-Shiller national home price index was released. It showed that in February, the average U.S. home price soared by a whopping 19.8% year over year. With COVID-19 receding as a crisis-level threat, and inelastic expenditures such as housing, gas, and food prices on the rise, investors may be concerned that the U.S. consumer could pull back on discretionary spending. (By the way, crude oil prices were bouncing higher as well on Tuesday after two days of relief.)
That could mean people canceling their Netflix subscriptions (which we saw occurring to a limited degree in its disastrous Q1 report), trading down to cheaper exercise bikes, or gambling less on sports.
One thing that could provide some solace to Netflix and Peloton investors is that both of those companies have gotten the message and are taking actions to cut costs. Peloton is already in the midst of a major restructuring program that will reduce headcount and capital expenditures, and is supposed to yield $800 million in run-rate savings. Meanwhile, Netflix management said it may moderate its content spending, is moving to crack down on password-sharing, and is considering adding an advertising-based tier.
Unfortunately for DraftKings shareholders, that company still projects a 2022 loss of nearly $1 billion in adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) as it navigates the hyper-competitive online gambling niche.
Image source: Getty Images.
Now what
These three stocks have fallen by so much since November that they may now appear to be tempting buys to some investors. Still, the concerns that led to those declines aren't exactly going away anytime soon. The Federal Reserve has many interest rate hikes planned, and it's poised to begin reducing its massive balance sheet next month. That could push long-term rates higher, which would hold down the valuations of growth stocks such as these three.
Of the three, Netflix looks the safest, since it's actually producing profits and cash flow now, and its forward earnings multiple has been compressed to around 18.5. However, it will be difficult for any of these pandemic-era darlings to materially appreciate this year if inflation stays relatively high. Even in a bullish note on Peloton last week, Citibank (NYSE: C) analysts said they were encouraged by the prospect that Peloton "could" reach positive adjusted EBITDA by the end of 2023.
Do investors really wish to wait until the end of 2023 to see if Peloton will break even? And remember, even adjusted EBITDA adds back real costs such as share-based compensation. Similarly, investors have to wonder if DraftKings will show operating leverage, or if it will continue to spend heavily on marketing to fend off the array of competitors entering the online gambling space?
While some of these stocks may be nearing a bottom, it's uncertain if that's the case. Meanwhile, there may be better bounce-back candidates in other areas of the market that are not as susceptible to the fickle behaviors of the U.S. consumer.
