In the midst of the growing IPO and SPAC technology market of 2021, a former Wall Street analyst was telling anyone he heard that something was wrong.
David Trainer, founder and CEO of research firm New Constructs, focused on the fundamentals of business behind record valuations, and what he saw was not very promising.
Trainer warned investors in 2021 that many high-tech stocks and IPOs at the time were trading at “tech bubble” levels. Worse, some were what he called “zombie companies,” or companies that were unable to generate enough cash flow to cover their debts, forcing them to borrow constantly to stay afloat. You have probably heard of some of these zombies, such as the training bike maker Peloton.
And Trainer has credibility here: His company website says that cutting-edge use of machine learning for market analysis has put it at the forefront of its field, partnering with many hedge funds and information providers, including Refinitiv and Ernst. & Young.
Now, with the Federal Reserve raising interest rates aggressively to combat inflation levels not seen for four decades, Trainer says some of these zombie companies could see their share prices fall to $ 0. as borrowing costs skyrocket.
“Time is running out for companies that burn cash that is kept alive with easy access to capital,” Trainer wrote in a research note Thursday. “These ‘zombie’ companies are in danger of going bankrupt if they can not raise more debt or equity, which is not as easy as it used to be. “As the Fed raises interest rates and ends quantitative easing, access to cheap capital is rapidly drying up.”
Some impressive calls
Before diving into Trainer’s current drop-down calls, it is important to look at its history. Trainer and his team of analysts at New Constructs have been willing to put their throats in the face of rising Wall Street analysts for years, and that has often paid off.
Take the example of electric vehicle maker Rivian, which went public on November 10, 2021 and watched its stock rise more than 50% in a single day, giving the company a valuation north of $ 100 billion.
At the time, leading Wall Street tech analysts, including Wedbush’s Dan Ives, called the company “the steady driving force of EVs.” Trainer, on the other hand, claimed that the real value of the company was more than $ 13 billion. Since then, Rivian’s stock has collapsed by more than 80% and its market capitalization is now just over $ 25 billion.
Then there is WeWork. In August 2019, just five days after the office leasing company – valued at $ 47 billion in private markets – filed its initial newsletter to go public, a New Constructs report called the IPO “the most ridiculous” And “most dangerous” year.
“WeWork copied an old business model, e.g. “It used office leasing, used little technology and encouraged venture capitalists to value the company at more than 10 times that of its closest competitor,” the report said.
Trainer and his team at New Constructs were not convinced that WeWork deserved its high rating, as they lost $ 1.9 billion with revenue of just $ 1.8 billion in 2018.
The company eventually failed to go public in 2019, laid off thousands of employees and saw its valuation crater below $ 5 billion. Now, after being listed on SPAC in 2021, the company has a market capitalization of less than $ 4.5 billion and lost another $ 435 million in the first quarter of this year alone.
On Thursday, Trainer presented some companies that are in an even worse position now than WeWork or Rivian once were. It’s time to meet the zombies.
Peloton training bike maker became a stock market favorite during the pandemic as investors rushed to find companies that would benefit from lockdowns and the growing trend of working from home.
The company’s stock jumped below $ 20 per share in March 2020 to over $ 162 at its peak in December 2021. All this time, Trainer and his team were unconvinced.
They added Peloton to the “Danger Zone” list – which tracks stocks that are highly valued by Wall Street but have underlying business model problems – in September 2019, arguing that the company is running out of cash at an unsustainable rate.
Peloton is now trading at just $ 10 per share and Trainer warns that things could get even worse.
“Peloton’s issues are well telegraph — given the stock’s decline last year — but investors may not realize that the company only has a few months to cash in on its operations, which puts the stock at risk of falling to 0 $ per share “, Trainer wrote in his research note on Thursday.
The New Constructs team noted that Peloton’s free cash flow, a measure of how much money a company has after paying its operating expenses and capital expenditures, has been negative every year since fiscal year 2019. The company has burned through $ 3.7 billion in free cash flow since then, and has only a few months to raise more money if it hopes to continue its operations with its current spending rate, Trainer said.
Online car retailer Carvana was another stock market favorite during the pandemic. As used car prices soared amid supply chain problems, Carvana saw its share rise from below $ 30 in March 2020 to more than $ 360 at its peak in August 2021.
Once again, Trainer and his team were not convinced. They have been holding Carvana in their “Danger Zone” since August 2020 and have watched as the stock has collapsed more than 88% this year alone.
Now, they believe that the company could even go bankrupt, causing its share to fall to $ 0.
Carvana has failed to generate positive free cash flows every year since it went public in 2017, spending $ 8.6 billion during that time. And in April, he was forced to take on more debt at interest rates that are not exactly outstanding. The company added $ 3.3 billion to senior unsecured bonds at an interest rate of 10.25%.
Even after the new cash inflow, Trainer says Carvana will be forced to raise more money by the end of the year. This is bad news for the online car retailer stock.
“Carvana’s declining cash supply, intense competition and rising valuation put the stock at risk of falling to $ 0 per share, which would be disastrous for investors, especially those who bought the stock in the summer of 2021, when trading north of $ 300 per share. “Trainer wrote in his research note on Thursday.
Pet food company Freshpet also saw its stock rise during the pandemic, but Trainer says investors ignored the company’s volatile business model and cash-burning history.
The New Constructs team put Freshpet in its “Risk Zone” in February 2022, arguing that it prioritized revenue growth by spending millions on advertising, without ever proving that it could make a profit.
Now, the stock has fallen more than 40% a year to date and Trainer says it has only nine months left with its current spending rate before it has to accumulate more debt.
“Investors are finally realizing the risks involved in Freshpet stock, which could fall to $ 0 per share,” Trainer wrote on Thursday. “Freshpet has increased the first line at the expense of the bottom line and the increase in sales has led to more cash burning. The company’s free cash flow (FCF) has been negative every year since 2017 and its FCF burnout has deteriorated in recent years.
Peloton, Carvana and Freshpet did not immediately respond to requests for comment.
This story was originally featured on Fortune.com