Better comeback stocks: Alibaba vs. Peloton

alibaba group (Baba -0.21%) and peloton interactive (Pton 1.87%) Both have frustrated many investors over the past few years. Alibaba stock hit an all-time high in October 2020 as bulls embrace China’s e-commerce and cloud leader, but has since faced strong macro, regulatory and competitive headwinds, sending it down more than 75% It fell.

Peloton stock closed at a record high in January 2021 as connected bike and subscription sales accelerated through the pandemic. But it has since lost about 97% of its value as growth stalled amid a broader economic reopening. Could any of these battered stocks be a valuable turnaround for patient investors?

Image source: Peloton.

Alibaba’s era of high growth is over.

Alibaba’s decline began when China’s antitrust regulators imposed a record $2.75 billion fine on the company’s e-commerce business in 2021. Alibaba was then prohibited from locking in merchants with exclusive deals, using aggressive promotions that generated losses, and making large-scale investments and acquisitions without legal restrictions. Government permission.

These restrictions eroded Alibaba’s defenses against its top competitors. PDD Holdings and JD.com. China’s unpredictable zero-corona lockdown and other macro issues also exacerbated the economic slowdown.

Alibaba’s cloud business struggled to grow as China’s e-commerce market cooled and companies reined in spending to deal with macro headwinds. It also lost ByteDance’s TikTok as a major customer because it transferred the personal data of overseas users overseas. oracleCloud platforms in 2022.

As a result of these pressures, Alibaba’s sales grew by just 2% in fiscal 2023 (ending March last year), compared to 19% in 2022 and 41% in 2021.

This slowdown convinced bears that Alibaba’s high-growth era was over, but the company is a fast-growing overseas market with Southeast Asian marketplace Lazada, Turkish marketplace Trendior, and cross-border marketplace AliExpress. We are expanding our e-commerce business. to offset that slowdown. Another key growth driver for the company is its Cainiao logistics division, which is expanding as an independent business to provide more services to third-party customers.

Analysts expect Alibaba’s revenue to grow at a compound annual growth rate (CAGR) of 8% from fiscal 2023 to fiscal 2026 as China’s e-commerce and cloud businesses stabilize. However, it expects net income to grow at a CAGR of 24% by reining in spending and spinning off some divisions into new IPOs. Based on these forecasts, the company’s stock price, with a forward P/E ratio of 11 times, looks extremely cheap.

Peloton is slow to solve its biggest problems

As gyms reopened and cheaper competitors entered the market, Peloton’s business began to crumble. Although the company expanded its business with connected treadmills and other products, sales were still down 11% in fiscal 2022 (ending June 2022) and 22% in fiscal 2023. We forecast a further 3% decline in fiscal 2024.

As Peloton’s growth stalled, the company laid off thousands of employees, outsourced production to a Taiwanese manufacturer, and began selling its products. Amazon Expand your reach beyond your own website and showroom.

Peloton also lowered the price of its equipment to keep pace with cheaper competitors, but raised subscription fees to compensate for lower gross margins. The company believes that by expanding its high-margin subscription business, it will ultimately be able to reduce its dependence on lower-margin sales of bikes, treadmills and other equipment.

These strategies have enabled us to expand profit margins and reduce adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) losses. Analysts expect the company’s adjusted EBITDA to turn positive in fiscal 2025, but the company is also expected to remain in the red for some time under generally accepted accounting principles (GAAP). On the bright side, analysts expect revenue to ultimately grow by 5% in fiscal 2025 and 7% in fiscal 2026, due to a “rightsizing” of the business.

Peloton’s stock looks cheap at a price-to-sales ratio of 1, but there’s no guarantee it will survive. The number of subscribers to paid apps was 2.97 million at the end of fiscal 2022, but only 718,000 at the end of the second quarter of fiscal 2024. There is a possibility that there will be no room to increase revenue per person. .

Clear winner: Alibaba

Although Alibaba has lost its mojo over the past few years, I believe it’s still worth owning as a low-growth e-commerce and cloud stock. The company’s stock price is low, it generates a lot of cash, and it’s constantly buying back its own shares. Peloton won’t go bankrupt this year, but it needs to stabilize its core business before it can be considered a worthwhile investment.