The meme stock mania commenced earlier this year with the unprecedented short squeeze rally of GameStop Corporation (GME) and AMC Entertainment Holdings (AMC). However, last week, during the Boston Investment Conference, billionaire investor Stanley Druckenmiller rang the bubble alarm and warned that meme stocks and many other assets are overpriced, creating concerns among retail traders.

Furthermore, according to the alternative data provider Quiver Quantitative, the average number of daily comments last month on Reddit’s WallStreetBets forum fell to half of its last year’s number. Also, the number of active users and funded accounts on a few financial platforms that allow investors to invest in stocks saw a dip in the third quarter.

Given this backdrop, we think investors should stay away from fundamentally weak meme stocks, Peloton Interactive, Inc. (PTON) and Zillow Group, Inc. (Z), because  they declined more than 35% in price last week.

Peloton Interactive, Inc. (PTON)

New York City-based PTON provides interactive fitness platforms that connect technology-enabled fitness, instructor-led classes to its customers. The company offers various fitness products, including the Peloton Bike, Peloton Bike+, Peloton Tread, and Peloton Tread+. In addition, cycling shoes, resistance bands, reversible workouts, heart rate monitors, yoga blocks are some of the accessories that the company provides to its users.

In August, Bragar Eagel & Squire, P.C., a shareholder rights law firm, began investigating officers and directors of PTON. Certain complaints were raised against PTON’s product’s safety, and thus alleged its products Tread+ posed a serious risk to public health and safety. If the investigation delivers  unfavorable findings, it could negatively impact PTON’s customers’ trust.

During its fiscal first quarter, ended September 30, 2021, PTON’s revenue under the Connected Fitness Products segment decreased 16.7% year-over-year to $501 million. The company’s gross profit declined 20.1% from its year-ago value to $262.7 million. Its total operating expenses increased 139.6% from the prior-year quarter to $622.4 million. Also, the company’s net loss came in at $376 million, compared to $69.3 million in net income in the fiscal first quarter of 2020.

Analysts expect PTON’s EPS to decrease by 623.3% in the current year. The stock has declined 39.2% in price over the past five trading days and 62.5% over the past nine months.

It is no surprise that PTON has an overall F rating, which translates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

PTON is also rated an F in Growth, Stability, and Value. Within the C-rated Consumer Goods industry, it is ranked #69 of 71 stocks. To see additional POWR Ratings for Sentiment, Quality, and Momentum for PTON, click here.

Zillow Group, Inc. (Z)

Incorporated in 2004, Z is a digital real estate company that operates real estate brands on mobile applications and websites. The Seattle, Wash.-based concern operates through three segments: Homes; Internet, Media & Technology; and Mortgages. Z facilitates various real estate transactions, including  buying, selling, renting, financing services, title and escrow services, and other related services under the Zillow Offers, Zillow Closing Services, Zillow Home Loans, and other brands.

This month, the Schall Law Firm, a shareholder rights litigation firm, began  investigating claims on behalf of Z’s investors.  The investigation began because  Z’s shares declined in price by  more than 10% last week because the company announced a shutdown of its home buying and selling unit and that it would also lay off its 25% workforce.

Z’s total revenue increased 164.4% year-over-year to $1.74 billion for the third quarter, ended September 30, 2021. However, the company’s gross profit decreased 41.7% from its  year-ago value to $240.58 million. Its net loss came in at $328.174 million, compared to $39.57 million in net income in the prior-year quarter. Also, the company’s negative adjusted EBITDA amounted to $168.74 million, compared to an adjusted EBITDA of $152.18 million in the third quarter of 2020.

Z’s EPS is expected to decline 290.9% in the current year. The stock has retreated 36.3% over the past five trading days and 57.9% over the past nine months.

Z’s POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, which translates to Sell in our proprietary rating system.

Z is also rated an F for Sentiment and Stability, and a D for Quality. Within the F-rated Internet industry, it is ranked #64 of 78 stocks. Click here to see the additional POWR Ratings for Z (Growth, Value, and Momentum).

PTON shares were trading at $49.70 per share on Monday morning, down $5.94 (-10.68%). Year-to-date, PTON has declined -67.24%, versus a 26.78% rise in the benchmark S&P 500 index during the same period.

About the Author: Priyanka Mandal

Priyanka is a passionate investment analyst and financial journalist. After earning a master's degree in economics, her interest in financial markets motivated her to begin her career in investment research. More...

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