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Recession Fears Fuel Peloton, SmileDirectClub Woes, Analysts Say

Bailey Lipschultz and Drew Singer
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Recession Fears Fuel Peloton, SmileDirectClub Woes, Analysts Say

(Bloomberg) -- Wall Street’s tepid reception to highly-anticipated IPOs from Peloton Interactive Inc. and SmileDirectClub Inc. shows rising anxiety that a recession could be on the horizon, analysts say.

The struggles for the home exercise company, the dental aligner maker, and ride-hailing peers Lyft Inc. and Uber Technologies Inc. may give a glimpse into how investors are valuing their services as well as what a global slowdown could mean for the consumer-dependent stocks.

“The weakest link is retail. Companies that sell to –- or stocks that are bought by -– individual retail buyers will feel the effects soonest and most,” said Rett Wallace, CEO of Triton Research Inc.

Weakness in these mega-IPOs has partially been driven by a rotation toward more defensive business models, MKM analyst Rohit Kulkarni said in a telephone interview. While Uber and Lyft could benefit from a spike in part-time drivers, demand for their services and Peloton’s subscription numbers may take a hit if consumers have less money to spend, he said.

“Consumer companies such as Uber, Lyft and Peloton will probably feel a more near-term impact of any potential slowdown in the macroeconomic space,” Kulkarni said. Traders could shun their monthly subscriptions or pay-as-you-go models, if slowing revenue lengthens their path to profitability.

The S&P 500’s brief climb above 3,000 for the first time in three weeks provided a lift for some of the beaten-down companies on Tuesday. Peloton had its best session, rising 9.2% off a record low, while SmileDirectClub bounced 6.3% to trade back above $10. But both stocks are still trading well below their offering prices.

Both had also set the terms for their IPOs in September, shortly after the spread between 3- and 10-year Treasuries bottomed out in August, indicating a higher probability of a recession. According to data compiled by Bloomberg, the probability of a recession had then peaked at nearly 40%.

SmileDirectClub’s more than 50% decline from its September offering has placed it among the year’s worst performers. An analyst who follows the company closely said in an email that he is impressed with its business model but acknowledged that “it certainly will have exposure to an economic downturn given the discretionary nature of orthodontics.”

Some of the best-performing IPOs show the inverse. Application software companies have seen their stock prices surge as investors favored firms that face businesses instead of individuals. Zoom Video Communications Inc. and CrowdStrike Holdings Inc. are a few that come to mind when surveying the landscape of red-hot companies whose business models might be more sustainable.

While Beyond Meat Inc. remains the year’s best performing IPO, with a more than 385% gain since going public in May, it has cooled off from its summer sizzle. The stock has lost almost half its value from a July 26 peak, shedding almost $7 billion in value.

Now, the challenge for investors, according to Kulkarni, is valuing large, unprofitable companies at just the time when the global economy may be headed for a slowdown, and maybe even recession.

To contact the reporters on this story: Bailey Lipschultz in New York at blipschultz@bloomberg.net;Drew Singer in New York at dsinger28@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Jennifer Bissell-Linsk, Scott Schnipper

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