today is May 20, 2022

Wish, Peloton, and Just Eat Takeaway are operating broken business models.

Key Points

  • Wish lost nearly half its active users and continues to bleed red ink.
  • Peloton is desperately trying to pivot as the pandemic-related momentum fades.
  • Just Eat Takeaway bit off more than it could chew by buying Grubhub, and it’s now causing headaches for its U.S. investors.

Over the past few months, inflation, rising interest rates, and geopolitical threats pummeled a wide range of individual stocks. But as Warren Buffett famously said, it's wise to be "greedy when others are fearful" -- so investors should still keep an eye out for good buying opportunities.

That said, investors should focus on broken stocks that are trading at discount to their true values, instead of broken companies that face fundamental problems. Today, I'll examine three broken companies -- ContextLogic (NASDAQ:WISH), Peloton Interactive (NASDAQ:PTON), and Just Eat Takeaway (NASDAQ:GRUB) -- and explain why they should be avoided.

A shopper gives a thumbs down sign.

Image source: Getty Images.

1. ContextLogic (Wish)

ContextLogic, the parent company of the e-commerce platform Wish, currently trades 90% below its IPO price of $24 per share. Some investors might be tempted to buy this stock at less than one times this year's sales, but it's dirt cheap for obvious reasons.

Wish ended the third quarter of 2021 with just 60 million monthly active users (MAUs), compared to about 100 million MAUs in 2020. It's lost MAUs year over year for three straight quarters, and its revenue has declined for two consecutive quarters. It's still deeply unprofitable, its founder and CEO Piotr Szulczewski resigned earlier this year, and his successor Vijay Talwar hasn't introduced any clear turnaround strategies yet.

Wish is struggling because it's a cross-border marketplace that mainly ships cheap products from China to overseas buyers. This business model exposes it to ongoing logistics and quality control issues, and critics have repeatedly accused the company of turning a blind eye to counterfeit and dangerous products. Those complaints recently caused French regulators to order the removal of Wish from the country's app stores, as well as the removal of search engine links to its website.

Wish also faces intense competition from Amazon's third-party Chinese sellers, Alibaba's cross-border AliExpress marketplace, and other regional competitors. Wish is aggressively subsidizing higher-quality merchants and expanding its own logistics network to address its shortcomings, but those costly strategies could merely burn more cash without boosting its revenue.

2. Peloton Interactive

Peloton experienced explosive growth throughout the pandemic as gym closures drove purchases of its connected exercise bikes. But as those lockdown measures were relaxed, the cracks started to appear.

As Peloton's growth decelerated in a post-lockdown market, the company clumsily diversified its business with connected treadmills, clothing, and even a set-top box. But its treadmill was recalled due to safety issues, its clothing line sparked a patent infringement lawsuit from Lululemon Athletica, and its set-top box barely registered with consumers.  

A steep price cut for its bikes last August indicated its business was in trouble, and a growing number of connected fitness challengers -- including Apple's Fitness+, Lululemon's Mirror, and cheaper bike makers -- indicated Peloton's heyday was over. As a result, its stock price has plunged nearly 80% over the past 12 months.

Analysts expect Peloton's revenue to decline 7% in fiscal 2022 (which ends this June) -- compared to its 120% growth in fiscal 2021 -- and for its net loss to widen more than six times year over year. 

An activist investor recently pressured Peloton's co-founder and CEO John Foley to step down, and the company cut 2,800 jobs to rein in its spending. But Foley's successor Barry McCarthy still faces a tough uphill battle -- and he recently dashed investors' hopes for a quick sale to a larger company.

Peloton's stock might seem cheap at less than three times next year's sales, but it certainly deserves to trade at that deep discount.

3. Just Eat Takeaway

Just Eat Takeaway, the Dutch company that took over Grubhub last year, is the world's largest food delivery player outside of China.

But like Peloton, Just Eat faces a challenging post-lockdown slowdown, widening losses, and an activist battle. Just Eat's revenue rose 54% on a combined basis (which normalizes the growth rates of its acquisitions) in fiscal 2020, and analysts expect its full-year revenue (which includes its inorganic gains for Grubhub) to rise 142% in fiscal 2021. Next year, they expect its revenue to grow 30% as it fully laps its Grubhub acquisition.

That top-line growth looks solid, but analysts also expect its net loss to widen more than five times year over year due to a loss of pricing power in a post-lockdown market and the integration of Grubhub's unprofitable business. All that red ink is prompting Cat Rock Capital, which owns 6.5% of the company, to repeatedly push Just Eat to sell Grubhub.

Just Eat hasn't reached a decision regarding Grubhub yet, but it recently announced it would delist its shares from the Nasdaq Exchange to reduce its expenses. U.S. investors will need to convert their shares to London and Amsterdam-based shares to stay invested -- which seems like a lot of trouble to stick with a stock that has tumbled 60% in value over the past 12 months.

Just Eat Takeaway seems cheap at just over one time next year's sales, but all the headwinds suggest that it's a value trap.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun owns Amazon and Apple. The Motley Fool owns and recommends Amazon, Apple, Lululemon Athletica, and Peloton Interactive. The Motley Fool recommends Just Eat N.V. and Nasdaq and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.