Comebacks can be lucrative. Betting on a stock that has fallen on tough times can pay off handsomely if the underlying company successfully turns things around. But as promising as turnaround plans often sound, few succeed.
Shares of Carvana (CVNA 1.16%) and Peloton (PTON -5.78%) are each down more than 90% from their pandemic-era peaks. While it may seem tempting to bet on the used car retailer or the connected fitness company, successful turnarounds look unlikely in both cases.
Carvana
Online used car seller Carvana grew like a weed during the pandemic. Sky-high demand and prices for used cars drove up revenue, and the company came close to turning a real profit. The company sold just over 425k retail units in 2021, up from 244k in 2020, and revenue more than doubled.
The party didn't last, though. Used car prices have moderated, and a sharp rise in interest rates has cooled demand. Carvana sold fewer retail units in 2022 than in 2021, and while revenue edged up slightly, the bottom line fell off a cliff.
In 2021, Carvana realized a gross profit per unit of $4,537. This metric, which has some serious flaws, dropped to just $3,022 in 2022. Gross margin was just 9.2% last year, and the company posted a net loss of $1.59 billion on $13.6 billion of revenue.
Carvana is now in a race to lean out its operations and remove the excess that built up during the pandemic-era boom before it's crushed by its heavy debt burden. Whether that's even possible without some sort of restructuring is an open question. The company had $8.3 billion in total debt at the end of 2022 and spent $486 million on interest last year. More than one-third of gross profit is going straight to its creditors.
Carvana is currently tussling with those creditors to figure out how to deal with this debt. Most recently, a creditor group controlling 90% of the company's outstanding bonds reportedly pitched a debt-for-equity swap. While this would knock down debt levels, it would also dilute existing shareholders.
Even if Carvana manages to tighten up operations enough to get close to breakeven, which it failed to do in 2021 when everything was going great, the debt load is a problem with no easy solution. The bond market is pessimistic -- a Carvana bond that matures in 2030 currently sells for $0.40 on the dollar, a sign that bond investors are not betting on a good outcome for the company.
While Carvana stock is already down 98% from its all-time high, it's hard to see a path that doesn't lead to further losses for shareholders.
Peloton
One thing you probably don't want to sell during a period of historically high inflation, sharply rising interest rates, and economic uncertainty is a pricey home exercise bike. While Peloton saw a surge in demand during the pandemic, prompting the company to ramp up production, that demand has now largely vanished.
Not only does Peloton compete with gym memberships and exercise classes, but there's also a slew of more affordable home exercise options available. Peloton is trying to be a premium brand and a mass-market brand at the same time, a strategy that rarely works.
Peloton has made progress in cutting costs, but the underlying trends are discouraging. Product revenue was down 52% year over year in the quarter that ended on Dec. 31, 2022, gross product margin was deeply negative, and operating costs are likely still too high. The company did grow its subscription revenue but increased its connected fitness subscriber count by just 2% from the previous quarter.
Free cash flow was a loss of $94.4 million in the quarter, a vast improvement from the prior year period. The company is aiming to return to revenue growth and reach breakeven free cash flow over the next year, but there's a decent chance that Peloton's bikes were a fad that has now played out. That's the nature of the home fitness industry.
If that's the case, it's hard to see where additional demand for Peloton's products will come from. A Morgan Stanley analyst recently pointed to a 27% year-over-year decline in web traffic for Peloton in the first three months of the year. That's a sign that with a lack of heavy promotion, interest in the Peloton brand is waning.
Peloton is somehow still valued at about $3.1 billion. Analysts expect sales to fall to $2.74 billion in the current fiscal year. With profitability nowhere in sight, Peloton doesn't look like a turnaround story worth chasing.
