The changing of the calendar has brought a new sentiment to Wall Street. Many of 2022’s biggest losers, such as meme stocks, SPACs and penny stocks, are suddenly enjoying strong rallies once again. With the Federal Reserve looking like it may stop hiking rates within the next few months, some optimism is returning.
However, this improving mood isn’t a green light to buy all depressed stocks indiscriminately. Many firms still face pressing challenges in terms of validating their business model, generating profits and shoring up their balance sheets.
The three penny stocks below, in particular, have all seen a major boost in retail trading interest in recent weeks. However, given their weak fundamentals, these penny stocks are likely to decline once this January rally wears off.
Arrival (NASDAQ:ARVL) is a company that is attempting to commercialize electric vans. However, like many former SPACs, Arrival made it to market before proving the validity of its business plan.
The company had been aiming to sell vans in the European market. However, in October, Arrival announced a pivot to the American market, citing a larger addressable market and revised federal tax credits. The problem is the company is running out of time.
Arrival is losing close to $100 million per quarter. The firm warned in November that it will likely run out of money in 2023 and that it doesn’t expect to generate revenue until at least 2024.
Given that, Arrival is a pure gamble at best. Without access to new funding, it’s hard to see how the company will stay in business until 2024 to hopefully start selling vans in the United States. And, even if it comes up with more funds, there is little evidence of commercial demand for the product given the failed rollout in Europe.
ARVL stock dropped as low as 14 cents a share in late December as traders prepared for an imminent restructuring. Over the past week, shares ran up as high as 94 cents. However, without new financing, ARVL stock will run out of juice quickly.
Oatly (NASDAQ:OTLY) is a company attempting to commercialize oat milk as an alternative to traditional dairy products. It attracted high-profile backers including Jay-Z and Oprah Winfrey. It gave consumers an enticing message about improving the world and people’s health.
However, many of these claims turned out to be hard to back up with evidence. The United Kingdom’s advertising watchdog made Oatly pull misleading ads from television and social media in 2022 after they greatly overstated the product’s environmental benefits.
Oatly’s beverages have struggled in another key way as well: profitability. Over the past 12 months, Oatly generated $713 million in revenue, but it cost the company $634.5 million to manufacture the product. This resulted in an anemic gross margin of just 11%. By contrast, typical gross margins in the beverage industry tend to be around 50%.
Oatly produced less than $80 million in gross profit over the past year. Unfortunately, it had $442 million of overhead, R&D and other operating expenses. In total, Oatly lost a stunning $347 million over the past 12 months. This is a profoundly unprofitable firm for an industry as staid as beverages.
And, with Oatly down to $120 million of cash and short-term investments as of last quarter, the company will likely have to resort to more dilution to avoid running out of money in 2023. All that bodes ill for OTLY stock going forward.
Amarin (NASDAQ:AMRN) is a biotech company that has spent the past decade commercializing Vascepa, a prescription-only omega-3 fatty acid product that is used to reduce triglyceride levels in certain adults. This can aid in improving outcomes in patients with heart conditions.
After a long and winding road, Amarin finally received FDA approval for Vascepa in late 2019, and the company began selling the product. However, it never quite reached blockbuster status.
Revenue peaked at $614 million in 2020 and dropped to $583 million in 2021. Analysts are forecasting sales of just $366 million for 2022 and a further decline this year to $327 million. Moreover, revenue never reached a high enough level to produce steady profitability, and analysts are forecasting more losses for 2022 and 2023.
Amarin is continuing to run studies on the drug and hopes to broaden the market for it by selling it for more conditions and categories of heart disease. However, the clock is ticking as generic competition is now bearing down on Amarin.
Despite the lackluster financials, AMRN stock has surged 52% so far in 2023. Its current $743 million market capitalization is likely excessive for a struggling firm whose primary drug has failed to reach the levels of commercial success the bulls had anticipated. Traders can use the recent pop to sell.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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On the date of publication, Ian Cooper did not have (either directly or indirectly) any positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.