- Unprofitable firms are at risk of their share values falling to $0, says David Trainer.
- In a recent note, he shared three firms he thinks are closest to bankruptcy.
- The Fed tightening policy aggressively will hurt these firms, Trainer said.
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For months, David Trainer warned that many unprofitable growth firms — or what he calls zombie companies — would eventually get put through the ringer, and their shares would lose massive amounts of value.
The market continued upward for a while after and Trainer looked quite wrong in his calls. Then the market topped out in early January this year, and havoc ensued, including for many of the names Trainer had been bearish on.
For example, last August, Trainer called for Shopify to fall 68%. Since then it's down around 78%. He also called for Snap to drop 91%. It's down 81%. And right before Coinbase had their IPO in April 2020, he said the firm should be worth 80% less. Since then its shares are down 86%. While he hasn't been right on every call — such as Tesla — the list of names he's correctly predicted a downfall for goes on. Advertisem*nt Last week, Trainer published new research on three names that have already suffered a lot, and is calling for them to suffer more. They include Peloton, Freshpet, and Carvana — Trainer is warning they could all fall to $0 per share. Each of the firms is low on cash, he said, making them vulnerable to a Federal Reserve aggressively hiking interest rates. They all have three months or less until bankruptcy, he said. Below are Trainer's calls for each (as of his June 23 note), and his reasoning for his bearishness. (Share price when report published on June 23: $11) Advertisem*nt Peloton has fallen 92% over the last 12 months as the company has struggled to sell their stationary bicycles. Shares of the company fell 35% in one day last November on bad earnings. While the firm's downfall, and their potential acquisition by firms like Nike or Apple, made headlines in recent months, Trainer said he's worried that investors aren't aware of further downside risk as a result of their low cash levels. "Investors may not realize that the company only has a few months' worth of cash remaining to fund its operations, which puts the stock in danger of falling to $0 per share," he said. He pointed to their past cash burn rate as a warning sign. Advertisem*nt If consensus growth rates are right, he said the stock should be worth $6 per share, or about 45% lower than its current price. This means increasing after-tax profit margins to 1.7% and revenues to 14% annually after 2024. If it doesn't achieve this, it's at risk of falling to $0 per share, he said. (Share price when report published on June 23: $55) To be worth $55 per share, Trainer said the firm would have to raise after-tax profits to 6% compared to -7% over the last 12 months and -6% in 2021. They'd also have to grow revenue by 34% annually until the end of 2028, he said. But that's very unlikely to occur, he said. Advertisem*nt "The number of companies that grow revenue by 20%+ compounded annually for such a long period are unbelievably rare, making the expectations in Freshpet's share price outright unrealistic," Trainer said. He warned that the company continues to burn through cash and is also at risk of bankruptcy. "Freshpet's stock surged during the pandemic, as investors ignored the company's years of cash burn, and now, investors are finally waking up to the dangers embedded in Freshpet's stock, which could decline to $0 per share," he said. "With just $30 million in cash and cash equivalents on the balance sheet at the end of 1Q22, Freshpet's cash balance could only sustain its FCF burn for less than one month after 1Q22." The stock has already come down substantially, falling 67% over the last 12 months. Advertisem*nt (Share price when report published on June 23: $25) Carvana is already down 92% over the last 12 months, but Trainer believes the stock has roughly another 80% downside. "Despite fierce competition and negative profit margins when used-car prices have skyrocketed, Carvana's stock is priced as if the business will grow revenues to higher levels than of CarMax (KMX) and AutoNation (AN), a feat that is highly unlikely to materialize," he said. Trainer said that the firm would have to grow after-tax profits margins to 3% from -1% in 2021, and grow its revenue by 16% for seven years straight in order to justify its current share price. Advertisem*nt Even if the company grows revenue and profits on par with the rest of the industry, a fair price for its shares would be 80% lower than today, he said. He also warned of Carvana's cash burn rate, shown below. Peloton
Freshpet
Carvana
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