Consumers suffer the most when inflation rises. It hits them at the grocery store, at the gas pump, and even at home, as the U.S. Federal Reserve typically raises interest rates to cool prices.
Inflation reached a 40-year high of 9.1% in June 2022, and despite some improvement since then, it will take time for it to fall in line with the Federal Reserve's target of 2%. As a result, household finances could remain tight for most of this year.
Companies like Peloton Interactive (PTON +1.39%) and DoorDash (DASH +2.62%) rely heavily on consumer spending, but the type of spending that is considered discretionary rather than necessary. That's just one reason to avoid them this year.
NASDAQ: PTON
Key Data Points
1. Peloton's future is hanging in the balance
If you own Peloton stock already, you probably know it has declined by 95% since hitting its all-time high price of $162. It was a pandemic darling, thanks to its at-home exercise equipment and virtual classes booming with popularity under lockdown conditions and social restrictions. But that world is now behind us, and with life mostly back to normal, Peloton's financial performance has cratered.
In fact, the company has been fighting for survival. It appointed a new CEO in February 2022, took out a $750 million loan to shore up its finances, and slashed its expenses by laying off staff and outsourcing its manufacturing. These moves are designed to trim Peloton's net losses to more manageable levels -- it burned a whopping $2.8 billion in fiscal 2022 (ended June 30), and a further $408 million in the recent fiscal first quarter of 2023 (ended Sept. 30).
With just $938 million in cash left on its balance sheet, Peloton really needs to clean up its bottom line, and fast.
How did it get here after so much success just a couple of years ago? Its revenue has stopped growing because consumers simply aren't buying as much at-home exercise equipment now that gyms have reopened. Plus, Peloton's hardware isn't cheap. Its new rowing machine is priced at $3,195, and that just doesn't jibe with consumers who are tightening their belts right now.
To its credit, the company is trying to unlock new sales channels. It used to sell its equipment exclusively through its own physical and online stores, but it has since partnered with Amazon and Dick's Sporting Goods to put its products in front of more consumers. Plus, it's trialing a new subscription-based sales model that will reduce the upfront cost of buying its equipment. Time will tell whether these measures lead to improvement.
Analysts are betting Peloton will generate $2.6 billion in total revenue in fiscal 2023, which would be a 25% drop compared to fiscal 2022. Given that fact, plus its substantial net losses and the weaker consumer, this just isn't the year I want to be buying Peloton stock.
NASDAQ: DASH
Key Data Points
2. DoorDash's net losses continue to grow
Food delivery is one pandemic habit that seems to have stuck. According to a recent survey, Americans are still having food delivered a little more than once per week and are spending up to $1,800 per year doing so. DoorDash is a leader in the space with a market share of 59% in the U.S., but that isn't necessarily translating to financial success.
The fact is, food delivery is an expensive business with razor-thin profit margins and it's awash with competition because, technologically speaking, platform services typically aren't that hard to replicate. Unfortunately, for that reason, companies can really only compete on price, which results in a race to the bottom. From there, it's a battle of who's willing to lose the most money.
Over the last four quarters, DoorDash has burned $881 million. Its loss of $296 million in the recent third quarter of 2022 (ended Sept. 30) was actually its largest since the end of 2020, and that's not very encouraging given the company has trimmed its marketing spending recently, which could result in a shrinking market share. If its revenue growth slows as a result, it's going to be really hard for DoorDash to reel in its bottom-line losses.
The upside is that DoorDash has $3.8 billion in cash, equivalents, and marketable securities on its balance sheet, so it can continue running at a loss for the foreseeable future. But the question is: Do investors want to own shares in a company with growing losses in this uncertain environment? Given DoorDash stock is down 80% from its all-time high, the answer seems relatively clear.
As inflation remains elevated and interest rates continue to climb, there's also the risk that consumers cut back their spending on food delivery services, given they're more about convenience than necessity for most people. With that uncertainty in mind, combined with the company's growing red ink, I'll be avoiding DoorDash stock in 2023.
