It feels harder than ever to find great companies to invest in right now, as the market continues to decline. And while investors know that each stock comes with some level of risk, the ones on this list have some outsize issues right now that investors should be aware of.
Here's why you should be cautious before buying Carvana (CVNA +2.80%), Redfin (RDFN +0.00%), Peloton Interactive (PTON +6.59%), Canoo (GOEV +1400.00%), and Robinhood Markets (HOOD +2.67%).
Image source: Getty Images.
1. Carvana
Carvana had all sorts of drama over the past couple of years. First, the company has been investigated by several states for selling vehicles to consumers without completing the proper vehicle title paperwork. In some cases, according The Wall Street Journal, customers couldn't get titles for the vehicles and thus couldn't register them for insurance purposes.
At least three states have suspended some Carvana dealerships from selling their vehicles because of these issues.
All of this has hurt the company's public image and it comes at a very difficult time for Carvana financially. The company benefited from the online car-buying boom during the pandemic, but now rising interest rates are severely weighing on the company's business.
In the third quarter Carvana's sales fell 3% to $3.3 billion and its net loss widened to $508 million, compared to a loss of $68 million in the year-ago quarter.
Carvana isn't just losing money though, it's at risk of filing for bankruptcy. The company spent a lot of money during the pandemic to keep up with surging used vehicle demand but its financials are in a precarious position.
Carvana has $6.3 billion in debt and only $477 million cash and cash equivalents -- and its debtors are preparing for possible restructuring.
NYSE: CVNA
Key Data Points
2. Redfin
There are some reasons to be bullish on Redfin right now. One main reason is that the stock looks relatively cheap considering its price-to-sales ratio is just 0.2 -- down from 2.7 this time last year.
But in Redfin's third quarter, sales slowed down and the bottom line reeled as the company's net loss widened to $90.2 million -- compared to a net loss of just $18.9 million in the year-ago quarter.
Part of the losses stemmed from the company's iBuying business, which Redfin recently announced is shutting down. That could help reverse some of the company's losses in the coming quarters, but it also comes at the cost of laying off 862 employees after letting 8% of its workforce go back in June.
But Redfin is nowhere near out of the woods even as it leaves the iBuying market. The company is expecting revenue to decline by 31% in the fourth quarter, at the midpoint of guidance, and for its net losses to continue to widen.
The main problem Redfin faces is rising mortgage rates as the Federal Reserve continues to hike the federal funds rate to fight inflation. All of which adds up to a dismal outlook for Redfin's immediate future.
NASDAQ: RDFN
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3. Peloton
It wasn't all that long ago that Peloton was a pandemic darling, with its share price skyrocketing as social distancing kicked in during the pandemic and gyms closed.
But the company's initial fairytale story has turned into a nightmare. In its fiscal first quarter (ended Sept. 30) sales of Peloton's connected fitness products (i.e., bikes and treadmills) plunged 59% to $204 million and its losses widened to $408 million.
The boom from the pandemic hasn't lasted and more cost-conscious consumers can't justify the high selling prices of Peloton's equipment amid sky-high inflation.
Another warning for potential investors is the fact that Peloton's co-founder and CEO John Foley left the company in September and other high-profile executives have also departed, including the company's other co-founder, Hisao Kushi.
With a potential recession on the horizon, inflation still high, and Peloton still losing lots of money, investors should keep their distance from this stock.
4. Canoo
It's been a rough ride for electric vehicle (EV) stocks lately as supply chain issues, rising inflation, and surging materials costs have weighed down companies in the EV industry.
The problem for Canoo is that it faces some serious issues in addition to all of these outside factors. One of the glaring issues with Canoo is that two years after going public the company hasn't come close to reaching its production targets.
Canoo's original plan was to produce between 3,000 and 6,000 vehicles in 2022, but so far the handful of vehicles it has produced for customers have been mostly for testing and analysis.
Making matters worse for Canoo is that it's losing a lot of money right now. The company's losses were $117.7 million in the third quarter and it had no revenue.
Lots of EV start-ups are losing money right now, but Canoo's lack of production ramp-up should be a concern for potential investors.
And finally, it's worth mentioning that Canoo's two co-founders and a handful of other top executives have left the company over the past couple of years. This can be a red flag for such a young company that's still trying to find its footing.
OTC: GOEV
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5. Robinhood Markets
Robinhood's app became a popular way for individual investors to buy and sell stocks during the pandemic as interest in investing surged.
But rising interest rates and high inflation have turned the stock market upside down. Additionally, as people went back into offices and the government stopped sending out stimulus checks, people had less time and money to spend trading stocks on their phones.
The result of all of this has been a huge decline in users on Robinhood's app. In the third quarter, the company's monthly active users (MAUs) fell 35% to 12.2 million.
Not only is that a huge decline in customer usage, but Robinhood is also making less money per user. In the quarter, Robinhood's average revenue per user (ARPU) was $63, down from $65 in the year-ago quarter.
And finally, the company's transaction-based revenue -- its largest segment of sales -- tumbled 22% to $208 million in the quarter and total sales slid 1% to $361 million.
The result has been that Robinhood's share price has fallen 55% over the past year and with the pandemic-fueled investing boom now over investors should wait and see if Robinhood can significantly increase its active users and ARPU again before considering this stock.
Demand more from your investments
The companies above are a good example of how easy it is to get caught up in short-term market conditions.
With the market still volatile right now, it's a good idea for long-term investors to look more closely at a company's top and bottom lines and make sure that it has a sustainable path for growth and profitability.
