The S&P 500 has been on a tear lately, gaining 26% almost in a straight line over the past six months. But the index sank 1.1% last week, and while that doesn't sound like much, it was the steepest drop on a closing basis since the final week of December.
The long gap between 1% weekly declines really speaks to the strength of the broader market, and most Wall Street analysts expect further upside throughout 2024. Considering we're in a bull market, sell-offs are typically a great opportunity for investors to buy. However, this is also a good time to trim positions in stocks that are underperforming.
Here's why Netflix (NFLX -0.75%) stock is a buy, and Peloton Interactive (PTON 3.16%) is a sell.
1. Netflix is consolidating its position at the top
Netflix is the world's largest streaming platform. It had 260 million subscribers at the end of 2023, placing it well clear of Walt Disney's flagship Disney+ service, which sits in second place with 150 million subscribers. Netflix is also the only streaming service generating a profit, placing the company in an advantageous position in an uncertain economic environment with interest rates at a 23-year high.
Those tricky conditions prompted competitors such as Disney and Amazon Prime to cut staff, and in Disney's case, slash billions of dollars from its content budget over the past two years. Meanwhile, Netflix plans to spend $17 billion on content in 2024, which is near a record high.
Netflix also recently announced a blockbuster deal with TKO Group Holdings to acquire the global rights to World Wrestling Entertainment, which will add a slate of live programming to the streaming platform. The deal is worth a rumored $5 billion over 10 years, beginning in January 2025, which proves Netflix is keeping its foot on the gas with long-term commitments while its competitors are pulling back.
Even though Netflix is the largest player in the streaming industry, its subscriber base grew by 12.8% in the fourth quarter of 2023 which was the fastest rate of increase since the beginning of 2021. The 13.1 million new subscriber additions was also a fourth-quarter record for Netflix.
The company owes that recent success to the introduction of its advertising tier, which allows consumers to pay just $6.99 per month for the full service instead of $15.49 for the Standard tier, or $22.99 per month for Premium. The advertising tier launched at the end of 2022, and Netflix says it accounts for around 40% of new signups in countries where the ad tier is available, with 23 million people signing up already.
Netflix also continues to crack down on password sharing, to convert the estimated 100 million households who are "borrowing" the service from a friend or family member into paying customers.
Netflix's revenue jumped 12.5% in Q4 to a record $8.8 billion. Like its subscriber growth, that was also the fastest rate of increase in two years. Management's forecast implies that revenue growth will accelerate even further in the upcoming first quarter of 2024, so any weakness in Netflix stock as a result of the broader market sell-off will almost certainly be a buying opportunity.
2. The future is bleak for Peloton Interactive
Peloton Interactive stock is down 37% in 2024 so far, even as the broader market trades in the green. If it's underperforming during good times, it could fare even worse when things turn -- therefore, cutting it from your portfolio in the midst of an S&P 500 sell-off might be a prudent decision.
Beyond the drop this year, Peloton stock is down 97% from its all-time high set during the height of the pandemic in 2020. The company's at-home, digitally enabled exercise equipment was a hit during COVID-19 lockdowns and social restrictions, but sales have slumped since society returned to normal. In fact, Peloton's annual revenue peaked at $4 billion in fiscal 2021 (ended June 30, 2021), and it has declined every year since.
CEO Barry McCarthy was appointed to right the ship in early 2022, but despite drastically cutting costs, the company's falling revenue continues to hurt its bottom line. McCarthy has slashed half of Peloton's workforce, offshored manufacturing, and tapped third-party sales partners like Amazon to reach more customers.
However, the company still isn't profitable. It has lost over $4.6 billion since fiscal 2021, including $354 million in the first six months of fiscal 2024 alone. Unfortunately, further cost cuts will stifle Peloton's ability to return to revenue growth, so it's in a downward spiral that will be very difficult to reverse.
McCarthy has introduced several positive initiatives. Customers can now buy Peloton's equipment on a monthly subscription basis, eliminating the up-front cost -- which, in the case of the flagship Bike+, is around $2,495. Peloton also launched a new mobile app last year for customers who don't own the company's equipment, to help them track their fitness journeys. However, it has only attracted 852,000 paid members so far, so it isn't moving the revenue needle.
The problem is Peloton's balance sheet. The company has only $737 million in cash and equivalents on hand, so it's in a race against time to return to growth and achieve profitability, neither of which is certain to happen. Plus, Peloton's suppressed stock price will make a capital raise extremely dilutive for existing investors, and taking on more debt probably isn't an option, considering it already has an outstanding loan of $691 million.
The chances of a recovery in Peloton stock are far outweighed by the risk of further downside. Therefore, investors who already own it might want to trim it, and those who don't should probably avoid it.
