To The Moon

The majority of analysts on Wall Street recommend positive ratings for PayPal Holdings Inc. $PayPal(PYPL)$ and Peloton Interactive Inc.  $Peloton Interactive, Inc.(PTON)$ . That is surprising given these two stocks haven't performed well over the past 52 weeks ending July 14. With positive recommendations despite share prices tumbling more than 59%, these two companies have earned the status of "falling knives."

Typically, investors are interested in falling knives because they hope to earn significant returns after an expected stock price rebound. However, investors must be cautious with falling knives as these kinds of holdings carry a remarkable level of risk. The sharp drop in the stock's price could be a sign of permanent problems - after all, investors have been selling them for a reason.

PayPal Holdings Inc.

PayPal Holdings Inc. is a San Jose, California-based provider of an online payment system to consumers and merchants worldwide.

Shares closed at $69.55 per unit on Thursday after falling 76.39% over the past 52 weeks.

The market capitalization is about $80.54 billion, the 52-week range is $67.58 to $310.16 and the 14-day relative strength index is 39.36, suggesting the stock is not close to oversold levels yet.

Regarding its financial strength, GuruFocus assigned a score of 6 out of 10 to the company, which means the financials are still stable. As of March 31, the company had almost $8 billion in cash and equivalents compared to total debt of $10 billion. The Altman Z-score of 1.86 indicates a low risk of bankruptcy within a few years. However, an interest coverage ratio of 17.04 means that the company has no problem paying the interest expense on its debt currently.

In terms of profitability, GuruFocus has awarded the company a score of 9 out of 10. According to Dan Schulman, the company's President and CEO, PayPal exceeded its revenue and earnings guidance for the first quarter of 2022 while outperforming in e-commerce.

For the first quarter of 2022, the company reported an increase in total payment volume (TPV) to $323 billion, up 13% (or 15% on a currency-neutral basis) from $285 billion in the first quarter of 2022. Pro forma earnings per share (EPS) were 88 cents in the first quarter of 2022, compared to $1.22 in the same quarter last year, on net sales of $6.5 billion, which grew 7% year over year (or 8% on a currency-neutral basis). The company increased the number of new active accounts by 2.4 million in the first quarter of 2022.

Looking ahead to full-year 2022, PayPal expects revenues to grow approximately 11% to 13% from 2021 (versus analysts' average growth forecast of 11.40%), while TPV is expected to exceed $1.4 trillion. The company also expects pro forma earnings per share to be between $3.81 and $3.93 and new active accounts to number 10 million.

On Wall Street, the stock has an average recommendation rating of strong buy, as 25 analysts have recommended buying the stock, four analysts have recommended holding and only one analyst has suggested selling the stock. The average price target is $117.58 per share.

Peloton Interactive Inc.

Peloton Interactive Inc. (NASDAQ:PTON) is a New York-based provider of interactive fitness products to nearly 6 million subscribers across North America and internationally. Interactive fitness products are marketed and sold directly through the company's retail locations and on onepeloton.com.

Shares closed at $8.34 per piece on Thursday after declining 92.46% over the past 52 weeks.

The market cap is around $2.81 billion, while the 52-week range is between $8.32 and $127.57. The 14-day relative strength index of 34.37 suggests the stock is not far from oversold levels after the steep decline.

GuruFocus gives the company a score of 4 out of 10 for financial strength, which means that the conditions are not very good, but not yet compromised. As of March 31, the company had $879.3 million in cash and equivalents, while total debt was $1.7 billion. Total debt is almost twice total cash. Also, an Altman Z-score of 0.23 implies a high bankruptcy risk that could materialize in a few years if the company doesn't reverse the trend and significantly improve its balance sheet in the near term.

The support must come from growth in operating activities, but, as the GuruFocus profitability rating of 1 out of 10 shows, these are not helping that much due to their very low profitability rate. Except for gross margin, which at 25.54% is below the industry median of 39.51%, all other metrics are negative.

To become more efficient, the company is executing a new strategy consisting of a production reorganization with staff reductions where necessary. The manufacturing restructuring process includes a temporary halt to specific lines of products amid bikes and treadmill machines.

In terms of staff reduction, Peloton is evaluating the implementation of several decisions that affect the organizational structure of the team other than its size, according to the company's plan. In February, talks indicated that some 2,800 employees were at risk of being laid off.

Based on the restructuring plan, the company is aiming for flexible operations, but financial results for the most recent quarter, which ended March 30, were still below expectations.

Earnings per share were $2.27 against an analyst median forecast of $0.83, while revenue declined nearly 24% year-over-year to approximately $964.3 million, missing the median projection of analysts by $5.5 million.

In the quarter, the company increased its Connected Fitness subscriptions by 195,000 new additions (an increase of more than 40% year-over-year), bringing the total to nearly 3 billion subscriptions. In addition, the average monthly churn from fitness service affiliates was 0.75%, while the average monthly training per fitness subscription was 19% (up 21% over the previous quarter, but nearly 30% less year-over-year).

The company's expectations for next quarter revenue and pro forma Ebitda don't seem to have impressed analysts either. The company expects revenue of $675 million to $700 million versus analysts' median forecast of $706.02 million. With respect to pro forma Ebitda, the company expects a loss of $120 million, while the average analyst estimate is a loss of $115 million.

On Wall Street, the stock has an average recommendation rating of moderate buy, as 14 analysts have recommended buying shares, 10 analysts have recommended holding and only two analysts have suggested selling the stock. The average price target is $21.32 per share.

source: GuruFocus