The work-from-home companies found themselves in the right place at the right time when the pandemic struck in Q1 2020. However, since peaking in 2021 (or late-2020), many battered pandemic darlings have been in free-fall mode with little relief.
Undoubtedly, many investors had unrealistic expectations for the “pandemic stocks” amid lockdowns. Video game stocks, home fitness equipment makers, and work-from-home software companies soared. At the same time, nearly everything else experienced a wild ride as pandemic lockdowns brought seemingly signaled a dramatic shift that some may have thought would last for years.
As it turned out, things returned to normal. Even though the pandemic hasn’t officially ended, the economy is open for business, and the pandemic darlings are in a huge rut.
Therefore, let’s analyze two pandemic winners that may finally be worth a second look. Wall Street analysts remain mildly upbeat on both names as the economy looks to deal with the aftermath of pandemic lockdowns that struck three years ago.
Peloton (NASDAQ:PTON)
Peloton stock was pedaling higher and faster than most other COVID-19 stocks in the early innings of the pandemic, but since peaking in December 2020, it’s been an excruciating ride for investors. The stock lost more than 96% of its value from peak to trough, making it one of the most remarkable of the pandemic-era bubbles to burst. The stock may seem cheap with upside potential once headwinds fade. That said, I just don’t see a competitive edge. For that reason, I am neutral.
The perfect combo of fear (that lockdowns would never end), greed, and the perceived opportunity to be had for Peloton from perpetual lockdowns, helped power PTON stock to more than $171 per share. These unrealistic expectations were quickly taken off the table, as the pull-forward in demand during lockdowns led to a nasty hangover that ultimately dragged shares to the single digits.
To this day, Peloton has continued to deal with demand woes. Not only are the gyms open again, but those who bought a stationary bike have already done so and won’t need one anytime in the near future.
All headwinds considered, it wasn’t too much of a shocker when Peloton clocked in more revenue declines and steeper losses. For Q2, revenue fell to $793 million, down 30% year-over-year. Per-share losses came in wider than expected ($0.98 EPS loss vs. $0.66 EPS loss consensus).
Other product categories (think treadmills) are likely to become tougher sells as macro headwinds weigh on consumers’ budgets. Finally, supply-chain issues and the effects of inflation (material costs) have added salt to Peloton’s wounds. Higher input costs and fading demand are a toxic combo for any firm.
It seems like Peloton has wandered too far off the path. Peloton may be a compelling play when you consider its steadier subscriber business, which features higher margins. However, there’s also a lot of competition in digital fitness, including the likes of Apple (NASDAQ:AAPL) and its Fitness Plus offering.
At 1.5 times sales, it seems like Peloton has hit rock bottom. Regardless, I don’t think there’s any reason to rush back into the name quite yet, given the lack of moat and the potential for a recession to weigh more heavily on demand.
What is the Price Target for PTON Stock?
Wall Street has a “Moderate Buy” rating on the stock, with eight Buys, 12 Holds, and two Sells. The average PTON stock price target of $15.22 implies 11.9% upside potential.
Electronic Arts (NASDAQ:EA)
Electronic Arts stock has held up far better than most other pandemic winners, with shares now down just 25% from their 2021 peak. The slow and steady tumble into bear-market territory has been ongoing for around two years now. Indeed, the video game industry has faced challenges of late, with most gaming stocks delivering negative returns in recent years. Despite this, I am bullish, primarily due to muted expectations.
Unlike Peloton, I don’t think recent softness can be blamed solely on a lockdown-era pull-forward in demand. Macro headwinds and inflation are also weighing on the sales and bookings of gaming firms across the board. Further, video game firms may be feeling the heat of video game subscription providers, which offer a library of titles for a monthly fee.
I think the monthly subscription model has changed the gaming industry in the same way streamers changed the video industry. As subscription services become better and deeper, I expect more cannibalization of individual game sales.
Of course, big-budget blockbuster titles could still be hot sellers in the subscription era. However, triple-A franchises (like EA’s Battlefield) are no longer guaranteed to be successful. Battlefield 2042, the latest installment in the series, is considered by many to be a flop.
Looking ahead, the bar is quite low following EA’s Q4 guidance cut. Revenue is expected to come in the $1.675 billion – $1.775 billion range, well below the original $2.24 billion consensus estimate.
What is the Price Target for EA Stock?
Wall Street has a “Moderate Buy” rating on the name, with 15 Buys and eight Holds. The average EA stock price target of $133.39 implies 19.1% upside.
The Takeaway
Despite how severely the tables turned against the pandemic plays, Wall Street analysts still see value to be had in Peloton and EA. Undoubtedly, the out-of-favor pandemic winners have their work cut out for them as the tides of a recession begin to move in.
