Peloton
Peloton, known for its connected-fitness equipment, has shifted its focus to its app, offering multiple subscription tiers that appeal to a wider audience beyond those willing to purchase expensive home-exercise equipment. However, the company’s turnaround efforts have been slow. Hardware sales are declining, membership numbers have dropped, and paid-app subscriptions have decreased. While Peloton has reduced losses by cutting costs, it continues to burn cash. With around $750 million in cash reserves, the company has a limited time to turn things around before facing liquidity issues that may require a costly capital raise. Selling more hardware won’t help the bottom line, as the fitness equipment segment is barely profitable. Slow progress in subscription revenue is not enough to counterbalance the challenges ahead for Peloton.
HP Inc.
HP Inc., a manufacturer of PCs and printers, experienced a temporary surge in demand for PCs during the pandemic but has since seen it return to pre-pandemic levels. Although HP has maintained its PC operating margins, it is unlikely that the PC business will be more profitable structurally after the pandemic. On the other hand, the printing business, driven by high-margin supplies, is more profitable. Estimates indicate modest growth in the global commercial-printing market. HP is generating cash flow but sustainability is an uncertainty. Despite trading at a low free-cash-flow valuation multiple, the company’s long-term prospects hinge on the stability of its cash flow.
Carvana
Online used-car marketplace Carvana faced significant financial challenges and recently reached a complex deal with creditors, reducing the face value of its debt and slashing cash-interest payments for two years. Although this benefits the company’s cash flow in the short term, the new debt carries higher interest rates, and after two years, Carvana will have to make cash-interest payments. Furthermore, the new debt is secured by the company’s assets, adding risk to its financial position. Carvana’s sales are declining, and while it has increased gross-profit per vehicle, the boost is unsustainable. The company achieved a positive net income in the third quarter due to a one-time gain from debt extinguishment. Although drawing down vehicle inventories has improved cash flow, it is not a long-term solution. Despite an inexplicable rally, Carvana’s valuation stands at nearly $11 billion. The best-case scenario for Carvana is to achieve a small profit, considering the ongoing debt problem and temporary relief from cash-interest payments.
In summary, while picking winning investment opportunities is crucial, avoiding potential losers is equally important. Peloton faces challenges in its turnaround, HP Inc. contends with uncertainty in its PC and printing businesses, and Carvana grapples with debt-related issues that impact its long-term prospects. As an investor, it is essential to carefully assess these factors before making investment decisions.