Alibaba Group (BABA 0.59%) and Peloton Interactive (PTON 4.29%) have both frustrated plenty of investors over the past few years. Alibaba's stock hit its all-time high in October 2020 as the bulls embraced the Chinese e-commerce and cloud leader, but it subsequently sank more than 75% as it faced fierce macro, regulatory, and competitive headwinds.
Peloton's stock closed at its record high in January 2021 as its sales of connected bikes and subscriptions accelerated throughout the pandemic. But it then shed roughly 97% of its value as its growth stalled out amid broad economic reopening. Could either of these beaten-down stocks be a worthwhile turnaround play for patient investors?
Image source: Peloton.
Alibaba's high-growth days are over
Alibaba's downfall started when China's antitrust regulators levied a record $2.75 billion fine against its e-commerce business in 2021. Alibaba was then barred from locking in its merchants with exclusive deals, using aggressive loss-leading promotions, and making big investments or acquisitions without the government's permission.
Those restrictions eroded Alibaba's defenses against its top competitors, PDD Holdings and JD.com. China's unpredictable zero-COVID lockdowns and other macro issues also exacerbated its slowdown.
As Alibaba's Chinese e-commerce marketplaces cooled off, its cloud business struggled to grow as companies reined in their spending to cope with the macro headwinds. It also lost ByteDance's TikTok as a major customer as it shifted the personal data of its overseas users to Oracle's cloud platform in 2022.
All of that pressure caused Alibaba's revenue to grow just 2% in fiscal 2023 (which ended last March), compared to its 19% growth in fiscal 2022 and 41% growth in fiscal 2021.
That slowdown convinced the bears that Alibaba's high-growth days were over, but it's expanding its higher-growth overseas e-commerce business -- which houses its Southeast Asian marketplace Lazada, its Turkish marketplace Trendyol, and its cross-border marketplace AliExpress -- to offset that slowdown. Its other major growth engine is its Cainiao logistics division, which it's expanding as a standalone business to provide more services for third-party customers.
From fiscal 2023 to fiscal 2026, analysts expect Alibaba's revenue to grow at a compound annual growth rate (CAGR) of 8% as its Chinese e-commerce and cloud businesses stabilize. However, they also expect its net income to rise at a CAGR of 24% as it reins in its spending and spins off some of its units as fresh IPOs. Based on those expectations, its stock looks dirt cheap at 11 times forward earnings.
Peloton is slowing resolving its biggest issues
Peloton's business started to crumble when gyms reopened and cheaper competitors entered the market. It expanded its business with a connected treadmill and other products, but its revenue still dropped 11% in fiscal 2022 (which ended in June 2022) and 22% in fiscal 2023. It expects another 3% decline in fiscal 2024.
As Peloton's growth stalled out, it laid off thousands of employees, outsourced its production to a Taiwanese manufacturer, and started selling its products on Amazon to expand its reach beyond its first-party website and showrooms.
Peloton also reduced its equipment prices to keep pace with its cheaper competitors, but it raised its subscription fees to offset its lower gross margin. It believes the expansion of its higher-margin subscription business will ultimately reduce its dependence on its lower-margin sales of bikes, treadmills, and other equipment.
Those strategies enabled it to expand its margins and narrow its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) losses. Analysts expect its adjusted EBITDA to turn positive in fiscal 2025, but it's also expected to stay unprofitable on a generally accepted accounting principles (GAAP) basis for the foreseeable future. On the bright side, analysts expect its revenue to finally rise 5% in fiscal 2025 and 7% in fiscal 2026 as it "rightsizes" its business.
Peloton's stock looks cheap at a price-to-sales ratio of 1, but there's no guarantee that it will survive. It only served 718,000 paid app subscribers at the end of the second quarter of fiscal 2024 -- compared to 2.97 million at the end of fiscal 2022 -- and it could run out of room to grow its revenue per subscriber before its entire business model implodes.
The obvious winner: Alibaba
Alibaba lost its mojo over the past few years, but I believe it's still worth owning as a slow-growth e-commerce and cloud stock. Its stock is cheap, it generates plenty of cash, and it's constantly buying back its shares. Peloton won't go bankrupt this year, but it still needs to stabilize its core business before it can be considered a worthwhile investment.
