Unrestrained inflation has been triggering a domino effect. The aggressive interest rate hikes by the Fed to bring prices down have been fueling recession fears and aggravating market volatility. Amid such turbulence, it could be wise to jettison fundamentally weak stocks Block (SQ), ChargePoint (CHPT), and Peloton (PTON) or sell them short. Continue reading….
The 8.3% year-over-year increase in August Consumer Price Index (CPI) has surpassed economists’ estimates and strengthened the Fed’s case for more aggressive interest rate hikes. Hence, market volatility is rife ahead of the Fed’s next rate decision on September 21, with a third consecutive 75-bps rate hike almost certain.
Persistent monetary tightening has come with collateral damage for individuals and businesses with increased borrowing costs, thereby increasing the odds of the economy slipping into a recession.
Given such uncertain economic and market conditions, it could be wise to avoid fundamentally weak stocks Block, Inc. (SQ), ChargePoint Holdings, Inc. (CHPT), and Peloton Interactive Inc. (PTON) or sell the short. These stocks seem to be falling knives.
Block, Inc. (SQ)
SQ is a technology company that creates tools to enable businesses, sellers, and individuals to participate in the digital economy. The company operates through two segments: Square and Cash App.
On August 24, it was announced that a class action lawsuit had been filed against SQ on allegations of negligent security after a breach of 8.2 million users’ data in the Cash App. The company disclosed the violation through an SEC filing four months after the incident without explaining the delay.
On August 19, the Consumer Financial Protection Bureau (CFPB) filed a petition asking a federal judge to force SQ to fully comply with the demands of an investigation related to Cash App’s handling of payments and disputes. The company is yet to provide all the documents and data requested by the bureau in August 2020 and August 2021.
SQ’s total net revenue declined 5.9% year-over-year to $4.40 billion for the second quarter that ended June 30, 2022. The company reported an operating loss of $213.77 million for the quarter, compared to $124.99 million in the year-ago period.
In addition, the company’s adjusted EBITDA for the quarter declined 47.9% year-over-year to $187.34 million. It reported an adjusted net income and adjusted net income per share of $110.74 million and $0.36, down 56.8% and 63.3% year-over-year, respectively.
Analysts expect SQ’s revenue for the fiscal year 2022 (ending December 2022) to decrease 0.5% year-over-year to $17.58 billion. The company’s EPS for the current year is expected to decline 48.9% year-over-year to $0.87.
The stock has plunged 57.6% year-to-date and 21.8% over the past month to close the last trading session at $69.18.
SQ’s POWR Ratings are consistent with its dismal performance and bleak outlook. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It also has a D grade for Stability, Sentiment, and Quality. It is ranked #91 out of 107 stocks in the Financial Services (Enterprise) industry. Click here to access SQ’s ratings for Growth, Momentum, and Value.
ChargePoint Holdings, Inc. (CHPT)
CHPT provides networked charging technology solutions.in North America and Europe. The company caters to various segments, such as commercial, fleet, and residential.
On August 9, 2022, it was announced that CHPT would be powering the chargers at new stores by Starbucks Corporation (SBUX) in partnership with Volvo (VLVLY) along a 1,350-mile route from the Colorado Rockies to the Starbucks Support Center in Seattle. However, it might take a significant time before this association has any material impact on the company’s financials.
For the second quarter of the fiscal year, ended July 31, 2022, CHPT’s non-GAAP operating expenses increased 50.2% year-over-year to $79.78 million. As a result, the company’s loss from operations during the same period widened 21.6% year-over-year to $90.37 million.
CHPT’s non-GAAP net loss widened 53.2% from the prior-year quarter to $61.86 million. The company reported a quarterly loss per share of $0.28.
Analysts expect CHPT’s loss per share for the fiscal 2023 third quarter ending October 31, 2022, to widen 20% year-over-year to $0.18. The company’s loss per share for the fiscal is also expected to worsen 23.4% to $0.76.
The stock has declined 14% over the past year and 3.7% over the past month to close the last trading session at $19.25.
CHPT’s weak fundamentals are reflected in its POWR Ratings. It has an overall F rating, equating to a Strong Sell in our proprietary rating system. It also has F grades for Value and Stability and a D for Quality.
Peloton Interactive Inc. (PTON)
PTON provides an interactive fitness platform and sells interactive fitness products in North America and internationally. The company operates through two segments: Connected Fitness Products and Subscription.
Yesterday, a U.S. International Trade Commission judge passed a verdict upholding allegations that PTON and two other firms infringed on DISH Networks’ (DISH) patents.
On Monday, September 12, John Foley and Hisao Kushi, two founders of PTON, announced their resignation as a part of an executive reshuffle amid a nosedive in fortunes for the company. Plagued by supply-chain and delivery challenges, the company ramped up its production to meet surging demand, only to find itself with a glut of machines as consumers returned to gyms.
Last month, PTON announced plans to cut approximately 800 jobs to reduce its operating footprint and costs. In addition to job cuts, the company announced price increases on specific products and outsourced functions such as equipment deliveries and customer service to third-party vendors. The company will also gradually close many retail showrooms beginning next year.
For the fiscal 2022 fourth quarter ended June 30, 2022, PTON’s total revenue decreased 27.6% year-over-year to $678.7 million. Its loss from operations widened 298.6% from the prior-year quarter to $1.20 billion. The company’s comprehensive loss worsened 301.8% from the year-ago value to $1.24 billion. Its net loss per share widened 250.5% year-over-year to $3.68.
Analysts expect PTON’s revenues to decline 14.6% year-over-year to $3.06 billion in fiscal 2022. In addition, the company is expected to report losses for the current and upcoming two fiscals. The stock has declined 71.4% year-to-date and 24.4% over the past month to close the last trading session at $10.68.
PTON’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of F, which translates to a Strong Sell in our proprietary rating system. PTON has a grade of F for Quality and Sentiment and a D for Value and Stability.
SQ shares fell $1.64 (-2.37%) in premarket trading Friday. Year-to-date, SQ has declined -57.17%, versus a -17.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master’s degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.