David Trainer, the founder and CEO of research firm New Constructs, was focused on the fundamentals of the businesses behind the record valuations, and what he saw wasn’t promising. 

Trainer warned investors in 2021 that many high-flying tech stocks and IPOs at the time were trading at “tech bubble” levels. And even worse, some were what he calls “zombie companies,” or firms that are unable to generate enough cash flow to cover their debts, forcing them to continually borrow in order to stay alive. You’ve probably heard of some of these zombies, like the workout-bike maker Peloton.

And Trainer has credibility here: His firm’s website says its cutting-edge use of machine learning to analyze markets has vaulted it to the front of its field, yielding partnerships with many hedge funds and information providers including Refinitiv and Ernst & Young.

Now, with the Federal Reserve aggressively raising interest rates in order to combat levels of inflation not seen in four decades, Trainer argues that some of these zombie companies could see their stock prices fall to $0 as the cost of borrowing soars.

“Time is running out for cash-burning companies kept afloat with easy access to capital,” Trainer wrote in a Thursday research note. “These ‘zombie’ companies are at risk of going bankrupt if they cannot raise more debt or equity, which is not as easy as it used to be. As the Fed raises interest rates and ends quantitative easing, access to cheap capital is drying up quickly.”

Some impressive calls

Before diving into Trainer’s current bearish calls, it’s important to look back at his track record. Trainer and his team of analysts at New Constructs have been willing to put their necks out in opposition to bullish Wall Street analysts for years now, and it’s often paid off.

Take the example of the electric-vehicle maker Rivian, which went public on Nov. 10, 2021, and watched its stock surge over 50% in a single day, giving the company a valuation north of $100 billion.

At the time, top Wall Street tech analysts, including Wedbush’s Dan Ives, were calling the company an “EV stalwart in the making.” Trainer, on the other hand, argued the true value of the firm was more like $13 billion. Since then, Rivian’s stock has collapsed more than 80%, and its market cap is now just over $25 billion.

Then there’s WeWork. In August 2019, just five days after the office leasing company—which was valued at $47 billion in private markets—filed its initial prospectus to go public, a New Constructs report called the IPO “the most ridiculous” and “most dangerous” of the year.

“WeWork has copied an old business model, i.e. office leasing, slapped some tech lingo on it, and suckered venture capital investors into valuing the firm at more than 10x its nearest competitor,” the report said.

Trainer and his team at New Constructs weren’t convinced that WeWork was worthy of its sky-high valuation after losing $1.9 billion on just $1.8 billion in revenue in 2018.

The company ultimately failed to go public in 2019, laid off thousands of employees, and saw its valuation crater to under $5 billion. Now, after going public via SPAC in 2021, the firm’s market cap is less than $4.5 billion, and it lost another $435 million in the first quarter of this year alone.

On Thursday, Trainer laid out a few companies that are even worse off now than WeWork or Rivian once were. It’s time to meet the zombies.

Peloton

The workout-bike maker Peloton became a stock market darling during the pandemic as investors rushed to find companies that would benefit from lockdowns and the growing work-from-home trend.

The company’s stock soared from below $20 per share in March of 2020 to over $162 at its December 2021 peak. That whole time, Trainer and his team weren’t convinced. 

They added Peloton to their “Danger Zone” list—which tracks stocks that are highly valued by Wall Street but have underlying business model issues—in September 2019, arguing the company was burning through cash at an unsustainable rate.

Peloton now trades at just $10 per share, and Trainer is warning things may get even worse moving forward.

“Peloton’s issues are well telegraphed—given the stock’s decline over the past year—but 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,” Trainer wrote in his Thursday research note.

The New Constructs team noted that Peloton’s free cash flow, a measure of how much money a firm has after paying its operating expenses and capital expenditures, has been negative every year since fiscal 2019. The company has burned through $3.7 billion in free cash flow since, and only has a few months to raise more money if it hopes to continue its operations at its current spending rate, Trainer said.

Carvana

The online car retailer Carvana was another stock market favorite during the pandemic. As used car prices soared amid supply-chain issues, Carvana saw its stock rise from below $30 in March 2020, to over $360 at its August 2021 peak. 

Once again, Trainer and his team weren’t convinced. They held Carvana in their “Danger Zone” since August 2020, and have watched as the stock has collapsed more than 88% this year alone. 

Now, they believe the company could even go bankrupt, leading its stock to fall to $0.

Carvana has failed to generate positive free cash flow every year since going public in 2017, burning through $8.6 billion in that time. And in April, it was forced to take on more debt at interest rates that aren’t exactly outstanding. The company added $3.3 billion in senior unsecured notes with an interest rate of 10.25%.

Even after the new cash influx, Trainer says Carvana will be forced to raise more money by the end of the year. That’s bad news for the online car retailer’s stock.

“Carvana’s dwindling cash supply, intense competition, and elevated valuation puts the stock in danger of declining to $0 per share, which would be devastating for investors, especially those who purchased the stock in summer 2021, when it traded north of $300 per share,” Trainer wrote in his Thursday research note.

Freshpet

The pet food company Freshpet also saw its stock surge during the pandemic, but Trainer says investors ignored the company’s shaky business model and history of burning through cash. 

The New Constructs team put Freshpet in its “Danger Zone” in February 2022, arguing it prioritized revenue growth by spending millions on advertising, without ever proving that it could turn a profit.

Now, the stock is down more than 40% year to date, and Trainer says it only has nine months of cash left at its current spending rate before it will have to pile on more debt.

“Investors are finally waking up to the dangers embedded in Freshpet’s stock, which could decline to $0 per share,” Trainer wrote on Thursday. “Freshpet has grown the top line at the expense of the bottom-line, and sales growth has driven more cash burn. The firm’s free cash flow (FCF) has been negative every year since 2017, and its FCF burn has worsened in recent years.”

Peloton, Carvana, and Freshpet did not immediately respond to requests for comment.