Shares of Roku (ROKU 5.41%) and Peloton Interactive (PTON 2.62%) soared to record highs in 2021. The pandemic generated strong tailwinds for both companies as cooped-up consumers streamed more videos on Roku's devices and exercised more frequently on Peloton's connected bikes. The subsequent buying frenzy in growth stocks -- which was amplified by the rise of commission-free trades, feverish discussions on Reddit, and stimulus checks -- boosted both stocks to bubbly valuations.
That's why it wasn't surprising when both stocks collapsed in 2022 as investors fretted over their cooling growth in a post-pandemic market. Rising interest rates exacerbated that pain by crushing higher-growth stocks.
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As of this writing, Roku and Peloton stocks have both fallen about 90% below their all-time highs. Let's take a fresh look at their business models, growth rates, and valuations to see if either stock is worth buying as a turnaround play.
Roku faces tough near-term headwinds
Roku is best known for its eponymous streaming devices, but it generates most of its revenue (and all of its profits) from Roku OS, a software platform that it installs on its own hardware and third-party devices. The lion's share of Roku's platform revenue comes from its integrated ads. It also hosts the ad-supported Roku Channel for its own streaming videos.
Roku's revenue rose 58% in 2020 and grew 55% in 2021. Most of that growth was driven by brisk sales of its players throughout the pandemic, which prompted advertisers to ramp up their spending on its platform. But it only expects its revenue to rise about 11% to $3.06 billion in 2022. Analysts expect its revenue to grow 6% to $3.24 billion in 2023.
That slowdown was caused by three headwinds: sluggish sales of streaming devices in a post-pandemic market, supply chain disruptions, and the impact of inflation and higher interest rates on the advertising market.
Instead of passing on its higher supply chain costs to consumers, Roku is selling its devices at negative gross margins to stay competitive. Roku also recently announced it would start producing its own smart TVs (which have notoriously low margins) to expand its hardware lineup. Meanwhile, its platform margins are also withering as it sells fewer ads and ramps up its production of original content for the Roku Channel.
As a result, analysts expect Roku to post a net loss of $497 million in 2022 -- compared to a net profit of $242 million in 2021 -- followed by an ever-wider net loss of $603 million in 2023. But its ecosystem continues to grow: Its active accounts rose 16% year over year to 65.4 million in its latest quarter, while its average revenue per user (ARPU) grew 10%.
But Peloton faces an existential crisis
Peloton's revenue doubled in fiscal 2020 (which ended in June 2020) and surged another 120% in fiscal 2021. Most of that growth was driven by the closures of brick-and-mortar gyms, which prompted affluent customers to buy its pricey bikes (which still start at $1,445 for the basic version) and pay monthly subscription fees for remote spin classes.
However, Peloton's growth stalled out as the lockdowns were eased and more gyms reopened. That slowdown coincided with the arrival of Echelon's cheaper exercise bikes, Lululemon's Mirror systems for remote workouts, and other subscription-based fitness services like Apple Fitness+. The initial launch of Peloton's connected treadmill in 2021 was also tarnished by a massive safety-related recall. Over the past year, inflation curbed the market's appetite for big-ticket purchases.
In fiscal 2022, Peloton's revenue declined 11% to $3.58 billion, and its net loss widened from $189 million to $2.82 billion. CEO John Foley resigned last February, and the company laid off about a fifth of its global workforce.
Peloton's new CEO Barry McCarthy is trying to stabilize the business by outsourcing its production overseas, abandoning its direct-to-consumer sales model in favor of selling its products on Amazon's third-party marketplace, and continuing to cut costs across the board, but he bluntly admitted last November that "turnaround remains a work-in-progress."
For now, analysts expect Peloton's revenue to decline 26% to $2.67 billion in fiscal 2023 as it narrows its net loss to $861 million. That outlook is grim, but Peloton still ended its latest quarter with 2.97 million subscribers, which was nearly flat sequentially but up 18% from a year earlier. If it cross-sells more hardware and services to those loyal customers, it could gradually boost its ARPU and stabilize its sales growth again.
The valuations and verdict
Both of these stocks look cheap: Roku trades at 2.1 times next year's sales, while Peloton looks even cheaper at 1.3 times next year's sales. But neither stock is a bargain relative to the near-term challenges.
I wouldn't rush to buy either of these fallen stocks yet, but I believe Roku's long-term expansion of its ad-supported software ecosystem will give it a better shot at a comeback than Peloton. Its gross margins should also improve as the macro headwinds wane, and it overcomes its supply chain challenges. As for Peloton, I'm not sure it can survive the recent transformations to its business as a growing number of well-funded competitors creep into its backyard.
