Carvana Co., Freshpet Inc. and Peloton Interactive Inc. could feel the cash burn as the Fed raises interest rates, according to independent stock research firm New Constructs.
The research company, which uses machine learning and natural language processing to analyze corporate applications and model financial gains, warns that time is running out for companies that burn cash kept in operation with easy access to capital.
“As the Fed raises interest rates and ends quantitative easing, access to cheap capital is rapidly ending,” New Constructs CEO David Trainer wrote in a research note released Thursday. “At the same time, many companies are facing reduced profit margins and may be forced to default on interest payments without the possibility of refinancing.”
As so-called zombie companies run out of cash to survive, risk premiums will rise across the market, according to New Constructs. This, in turn, could further squeeze liquidity and create an escalating series of corporate bankruptcies.
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Specifically, Trainer highlights Carvana CVNA,
“Reduction in the cash supply, intense competition and increased valuation”, which put the stock in danger of falling to $ 0 per share.
“Carvana has failed to generate positive free cash flows in any year since it went public in 2017,” he added. “Since 2016, Carvana has burned $ 8.3 billion in FCF (Free Cash Flow).”
Shares of the used car retailer have fallen 88% in 2022 amid downgrades and losses, overcoming the SPX fall of the S&P 500 by 20.5%. In April, Carvana reported higher-than-expected first-quarter losses, citing a “uniquely difficult environment”. Last month, Carvana also announced plans to lay off more than a tenth of its staff.
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Carvana is very short-circuited. New Constructs put Carvana in the research company’s “danger zone” in August 2020, and Trainer notes that, in short, it has surpassed the S&P 500 by 95% since then. However, even with year-to-date reductions, Trainer believes the stock is falling further.
Another zombie company is Freshpet FRPT, a pet food company.
according to the CEO of New Constructs. “Freshpet stock skyrocketed during the pandemic as investors ignored the company’s years of cash burning and now, investors are finally realizing the risks involved in Freshpet stock, which could fall to $ 0 per share” , He wrote. “Freshpet has increased the first line at the expense of the bottom line and the increase in sales has led to more cash burnout.”
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Freshpet shares have fallen 41% in 2022 and in the last 12 months, its shares have fallen 65.5%, compared to the 10.1% drop in the S&P 500 over the same period. The company recently issued fiscal guidelines for the fourth quarter and the full year that were below analysts’ expectations.
The trainer also has a negative opinion of Peloton’s PTON,
stock. “Peloton’s issues are well telegraphed – 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 notify “, he wrote.
“Despite rapid growth, particularly in 2020 and 2021, Peloton’s free cash flows (FCF) have been negative each year since fiscal 2019.” Since then, Peloton has burned $ 3.7 billion, he added.
Trainer also noted the recent $ 750 million Peloton $ 5 million loan from JP Morgan Chase & Co. and Goldman Sachs, which he described as “extremely” creditor-friendly. “Assuming the average FCF burnout over the last two years, and including the additional capital raised a month ago, Peloton only has 11 months of cash before it needs to raise more capital or stop the business,” he wrote.
Last month, Peloton had a negative outlook when it reported its third-quarter fiscal results, citing “lower demand”. The company’s shares have fallen 71.53 this year and 91.3% in the last 12 months.