The stock market is having an extremely positive year. The benchmark S&P 500 index is up 19%, and the Nasdaq-100 technology index has gained 46%. Both came into 2023 nursing brutal losses from 2022 that plunged them into bear territory.
Historical data proves consecutive down years are incredibly rare, so the odds of a bounce back in 2023 were high. Now that it has happened, investors might be wondering what 2024 has in store. Well, for both the S&P 500 and the Nasdaq-100, bounce-back years like 2023 have always been followed by another positive year.
A new bull market might be around the corner
When a stock index like the S&P 500 falls by 20% from its all-time high, experts agree it constitutes a technical bear market. That occurred in 2022, but the index has risen 27% since marking its low point in October last year, leading to a debate on Wall Street about the official classification of the market right now.
Some analyst firms and banks like Bank of America have declared the beginning of a new bull market. Others believe the S&P 500 needs to make a new all-time high before the bear officially returns to hibernation. It's a stone's throw away from getting there; it only needs a gain of 4% from where it's trading right now.
That means if history repeats itself and the stock market has another positive year in 2024, a new bull market could very well begin -- by all definitions.
With that in mind, there are several stocks investors should consider buying ahead of the new year. But I'm going to share two with downside potential that investors might want to avoid.
Image source: Peloton Interactive.
1. Peloton
Shares of Peloton Interactive (PTON 1.52%) have plunged 27% this year despite the rally in the broader market, and it's now trading 96% below its all-time high. The manufacturer of connected at-home exercise equipment had a stunning fall from grace from its pandemic-era success.
Lockdowns and social restrictions worked in Peloton's favor as consumers were confined to their homes, but with gyms now open again and life mostly back to normal, the company is really struggling. Annual revenue peaked in fiscal 2021 at $4 billion, but it's on track to generate just $2.7 billion in the current fiscal 2024 year (ending June 30).
The drop in revenue caused major issues for the company's bottom line, and it continues to slash costs to carve a path to profitability. New CEO Barry McCarthy has cut the workforce in half, shifted manufacturing offshore, and tapped new sales partners like Amazon and Dick's Sporting Goods to save the company money.
McCarthy also pivoted Peloton toward more predictable subscription-based revenue streams. Customers can now buy its flagship Bike and Bike+ equipment for a monthly fee, which eliminates the significant up-front cost burden. Plus, the company is trying to increase its addressable market by offering its mobile application to people who don't own Peloton equipment.
NASDAQ: PTON
Key Data Points
Users who choose the most expensive monthly app subscription tier can access a number of virtual classes and features to help them work out whether they enjoy running, yoga, Pilates, or other modes of exercise.
Unfortunately, none of those initiatives have returned Peloton's revenue to growth just yet. And despite a substantial 61% year-over-year reduction in operating costs during the recent fiscal 2024 first quarter (ended Sept. 30), the company still had a net loss of $157 million under generally accepted accounting principles.
Considering it has only $748 million in cash remaining on its balance sheet, it will have to achieve profitability sooner rather than later.
Growing its revenue will be a key step toward that goal. The company recently announced several brand partnerships with the likes of Lululemon, the National Basketball Association, the University of Michigan, and British Premier League soccer club Liverpool FC. Theoretically, they will help elevate the Peloton brand and drive more sales, but their near-term impact is unclear at this stage.
Entering a new year with strong potential stock market gains in the cards, investors don't have to bet on the resurgence of a struggling brand to make money. There is an abundance of other high-quality opportunities to consider instead.
2. Robinhood
Robinhood Markets (HOOD +5.19%) is another business suffering a structural decline across some of its most important operating metrics. Like Peloton, Robinhood was a pandemic darling because young investors flocked to its stock, cryptocurrency, and derivatives brokerage platform to participate in the roaring stock market during 2020 and 2021.
But that market frenzy was driven by unusual circumstances, including record low interest rates, trillions of dollars in government stimulus, and young people who were confined to their homes under pandemic restrictions. Each of those factors has since disappeared, and Robinhood's monthly active user base has declined by 51% from its peak of 21.3 million in 2021, to just 10.3 million in the recent third quarter (ended Sept. 30).
NASDAQ: HOOD
Key Data Points
Here's where investors need to pay close attention. Robinhood's revenue increased by 29% year over year during the third quarter, and while that was a fantastic result, it isn't the whole story. The company's core business is brokering; it generates revenue when customers buy and sell financial assets. During the third quarter, that transaction revenue fell by 11%.
The increase in Robinhood's overall revenue came from a surge in its interest revenue. The rapid rise in interest rates since 2022 allowed Robinhood to earn substantial amounts of money on the $4.9 billion in cash sitting on its balance sheet, and the $3.4 billion in cash it's holding on behalf of its clients.
In the third quarter, the company's interest revenue increased by a whopping 96% compared to the same quarter in 2022, when interest rates were much lower.
As a result, interest revenue accounted for more than half of Robinhood's total revenue. But experts predict the Federal Reserve will begin cutting interest rates in 2024, and that's going to be a drag on what is now Robinhood's only driver of growth. That's a huge problem.
Plus, Robinhood is still losing money at the bottom line (though it is improving), which means its cash balance will continue to dwindle as long as that is the case. That shrinks the amount of interest-earning capital available to the company, which will be another drag on its growth.
Simply put, there is no indication the active user base will stop shrinking anytime soon, which will make it incredibly difficult for the company to grow its transaction revenue. If interest rates do begin to fall, Robinhood's largest source of revenue will likely also begin to shrink.
Those factors point to a very difficult 2024 for Robinhood, and it's little wonder its stock remains 86% below its all-time high.
