Many investors love investing in growth stocks to maximize their returns. These are often high-risk, volatile companies with enormous potential as they chase large total addressable markets.
But not every growth stock is created equal, and many growth stories fail to play out as their management teams optimistically predict. As a result, it can be extraordinarily difficult for entrenched shareholders to know when to sell.
With that in mind, here are two growth stocks I think bullish investors would be wise to consider rethinking now.
A cash-burning electric vehicle play
Shares of Nikola (NKLA -4.40%) have climbed a modest 12% year to date as of this writing — but they’ve also nearly quintupled from their June 2023 lows, in part thanks to recent news of encouraging early bookings for its hydrogen fuel cell-powered electric trucks.
But if last week’s developments are any indication, those gains could prove unsustainable; Nikola stock dropped 26% on Friday after the electric vehicle specialist announced second-quarter results that were roughly in line with expectations. But it also announced its CEO, Michael Lohscheller, is stepping down effective immediately after only 18 months with the company.
On the latter, Nikola cited a “family health matter” as the reason for Lohscheller’s resignation — and he’s already been replaced by the company’s board Chairman Steve Girsky. But it certainly doesn’t instill confidence that this will be Nikola’s fourth CEO in as many years.
Perhaps even more concerning, last week Nikola also received shareholder approval to raise cash by issuing new stock that could double its total number of shares outstanding. For perspective, after raising around $233 million in cash during the second quarter from sales of stock and physical assets, the company ended the first half of 2023 with just under $227 million on its balance sheet. And during its quarterly conference call with analysts, management estimated they’ll need around $600 million of additional capital to execute future growth initiatives and scale the business through to sustained profitability.
Even putting aside the fact that company founder and former CEO, Trevor Milton, was convicted of securities and wire fraud late last year in relation to false statements he made about the business to bolster Nikola’s stock price, that’s a tremendous amount of cash to raise for a business currently sporting a market cap of only $1.8 billion.
That’s not to say Nikola can’t prove its doubters wrong in the end. But given its continued executive turnover and the relative certainty that significant additional dilution is on the way, I’m perfectly content watching this one from the sidelines.
This unlikely turnaround makes me sweat
At the height of the pandemic, Peloton Interactive (PTON -2.31%) was practically unrivaled in terms of investor excitement among growth stocks — at one point even commanding an incredible market cap of nearly $50 billion. But it grew far too quickly for its own good, eventually falling victim to a bevy of headwinds from supply chain challenges to a massive inventory glut, and more recently recalls of millions of its bikes.
It certainly didn’t help last quarter when the cash-burning company was essentially forced to agree to a $75 million patent-infringement settlement with DISH related to its streaming technologies. But now the company is smack dab in the middle of a turnaround plan to return to growth (revenue last quarter fell 6% year over year), notably including a recent company rebrand with multiple new subscription tiers (two paid, one free) for its Peloton App.
The problem? Peloton’s connected fitness subscriber base has remained stagnant over the past year, climbing a modest 5% year over year last quarter to just over 3.1 million members — and management has already suggested they expect a seasonal decline in subscribers in the current fiscal fourth quarter. This rebrand also propels Peloton further into an increasingly crowded niche — and squarely into the crosshairs of massive, well-funded fitness app providers. with heavyweights like Apple, Nike, Under Armour, and Lululemon flexing their muscles in the fitness app arena, Peloton’s got its work cut out.
It might be tempting to buy Peloton shares now with its market cap pedaling in place around $3 billion as of this writing. But until it shows signs that its rebrand can drive sustained, long-term growth and a clear path to profitability, I’m not a buyer.
Steve Symington has positions in Lululemon Athletica. The Motley Fool has positions in and recommends Apple, Lululemon Athletica, Nike, Peloton Interactive, and Under Armour. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.