These 2 stocks are down 90% and may never recover

A bear market is a great time to invest in good companies that have been unfairly punished by panicked investors. Some of the best deals you’ll ever see take place during double-digit stock market declines.

But investors should be very careful to avoid buying stocks that have been punished for good reasons. Some companies can look like high-quality operations at the best of times, earning exorbitant valuations, only to be exposed as disasters when a bear market lifts the veil.

online furniture retailer Wayfair (W -1.18%) and oat milk pioneer oatly (OTLY -2.75%) seem to belong to this category. With the pandemic tailwinds gone and the economy heading into a recession, a return to these stocks looks like a pipe dream.

Wayfair

It took billions of stimulus dollars and a global pandemic that forced people to spend a lot more time at home for online furniture seller Wayfair to turn a profit. And even then, the profits were far from impressive. The company managed net income of $185 million on $14.1 billion in revenue in 2020, good for a meager profit margin just above 1%.

If a business only works when things are going well, then it doesn’t work at all. Wayfair now finds itself in the exact opposite environment. Demand has plunged, inflation is causing people to think seriously about their purchases, and costs are soaring. Wayfair is back to losing money at the fist.

Revenue fell nearly 15% in the second quarter and the company posted a net loss of $378 million and a free cash flow loss of $244 million. Wayfair doesn’t hold any significant inventory, which is a good thing since many retailers are overloaded with merchandise. Unfortunately, that means it competes with retailers that offer deep discounts on products.

Shares of Wayfair are now trading around early 2020 panic levels, down about 91% from their all-time high. It may still be too expensive. The company is valued at around $3.2 billion, although it has lost over $2.6 billion in its lifetime. Its only profitable year was a once-in-a-century anomaly, and the balance sheet has $3 billion in debt and a cash balance that is flaring up as demand implodes.

If Wayfair survives the current downturn, the chances of it soon regaining its pandemic-era highs seem remote.

oatly

While non-dairy milk alternatives aren’t going anywhere, the industry has gone through several iterations. Soy milk was once the leader, then came almond milk, and now oat milk is gaining popularity.

For a time during the pandemic, Oatly struggled to meet demand for oat milk. The company has drawn up big plans to significantly increase its production capacity, planning to spend up to $400 million this year in capital expenditures. But then demand started to falter and the company cut those spending plans.

Oatly has three big problems. First, oat milk is probably not the be-all and end-all of the dairy alternative market. Like all the other types of alternative milk that have become popular before it, eventually something will take its place. Second, oat milk is probably a commodity, or almost. There are many brands, including discount store brands, eating away at Oatly’s market share. Third, Oatly struggled to turn a profit even when things were going well. How a company loses money by selling oats, vegetable oil and water at prices much higher than real dairy is really a mystery.

Oatly’s revenue continues to grow, but gross margin slumped to just 16% in the second quarter, and the company reported a net loss of $72 million on $178 million in revenue. Oatly’s envisioned demand simply does not materialize.

Oatly shares are down 91% from their all-time high, despite the company still being valued at $1.5 billion. While Oatly expects to achieve a gross margin above 40% over the long term, this goal seems quite far-fetched. The dairy industry is a low-margin business, and I see no reason why the alternative dairy industry should be much different.

Even as oat milk continues to grow in popularity, the competition seems likely to eat Oatly alive.

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