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Why Shopify, Peloton, and Carvana Fell Hard on Wednesday

Motley Fool - Wed Jun 29, 2:33PM CDT

What happened

Shares of Shopify(NYSE: SHOP), Peloton(NASDAQ: PTON), and Carvana(NYSE: CVNA) were plunging on Wednesday, down 6.6%, 7%, and 8.8%, respectively, as of 2:51 p.m. ET.

There wasn't much new company-specific news today, but these three former market darlings fell as recession fears appeared to mount in the market. Of note, Shopify completed its 10-for-1 stock split today, which usually leads to a bump in retail buying. However, the stock fell anyway, perhaps on a "sell the news" event.

Since these three companies boomed during the pandemic, investors and analysts are fearing a continued-demand "air pocket" in 2022 as consumer budgets get squeezed. Additionally, Peloton saw its price target lowered by Wall Street analysts today, adding to the pessimism.

So what

On Wednesday, first-quarter U.S. GDP figures were revised downward from a 1.5% estimated decline to a 1.6% decline. Although some may not find that particularly noteworthy, the downward revision comes after the Federal Reserve had already aggressively hiked the federal funds rate. The fear is that the Fed is hiking into an already-slowing economy, which could make a slowdown more painful and perhaps even lead to a recession. Even worse, food and energy prices remain at elevated levels due to supply shocks and the war in Ukraine, leaving less money left over for goods bought on Shopify, Peloton bikes, or used cars from Carvana.

Peloton also saw its price target slashed to $20, down from $24, by analysts at J.P. Morgan. Meanwhile, analysts at UBS cautioned that the Peloton Digital app is losing market share to Planet Fitness(NYSE: PLNT). So that wasn't great for Peloton, which is attempting a big turnaround after overordering bike inventory during the pandemic boom.

Peloton and Carvana were also highlighted last week by research firm New Constructs as companies highly vulnerable to higher interest rates since both companies are burning cash with suspect balance sheets. David Trainer, founder and CEO of New Constructs, called them "zombie" companies that could potentially go to zero or have to undertake highly dilutive capital raises if they continue to burn cash at this rate. Will Carvana and Peloton be able to cut costs and increase profitability while also continuing to grow? That's definitely a tougher task in a higher-rate environment as consumer confidence continues to plunge.

It's a bit more difficult to know why Shopify is falling so much other than the fact that it had rallied off of its lows hit in mid-June up until yesterday, perhaps in anticipation of the split. It appears traders are fading that boost, believing it to be only a dead cat bounce.

Now what

The thing that links these companies is that each is a consumer discretionary stock that's also vulnerable to higher interest rates. Peloton and Carvana may be vulnerable to higher rates because they may need to raise more capital at some point, while higher rates also hurt high-growth, high-multiple stocks like Shopify. So, these companies, while getting the tailwinds of low rates and soaring demand from the pandemic, are now getting all the headwinds as trends reverse.

It's very hard to know when these stocks will bottom. If the economy doesn't go into a recession, and if management executes, these beaten-down names could have lots of upside. However, if we do have a bad recession, it's possible Peloton and Carvana might not make it to the other side. Therefore, investors in these turnaround stories should really know the companies well and have confidence they'll be able to weather the storm. If not, it's probably better to invest in more defensive names until inflation gets under control.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Peloton Interactive, Planet Fitness, and Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

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