Peloton (PTON 2.58%) will be glad when 2021 is over. The year has been an agonizing one for the interactive exercise equipment maker. The stock is down 75% as world economies are reopening, and the demand for in-home exercising is losing momentum.
However, 2022 could be a better year for Peloton as it expands into new territories and new products. Let's look closer at Peloton's business and its prospects to determine if investors should buy, hold, or sell the stock.
Investors are disappointed in slowing growth and rising costs
Sales growth may indeed be slowing down for Peloton as economies reopen, but it's essential to look at how rapidly they have risen in the past. From 2017 to 2021, Peloton's revenue increased from $219 million to $4 billion. What's more, Peloton was growing sales by nearly 100% per year, even before the pandemic onset. That goes to highlight that the company is not solely a stay-at-home stock.
Still, investors were disappointed when Peloton management revealed a fiscal year 2022 revenue target of $4.6 billion at the midpoint. If it ends up hitting that estimate, it will entail year-over-year revenue growth of 15%. That's a significant deceleration of previous years' near-100% growth rates, so, understandably, the market was not happy with this revelation from management.
Another disappointing factor troubling investors is that Peloton used up a lot of cash recently. At the end of its most recent quarter on Sept. 30, it had $924 million in cash and equivalents on hand. Meanwhile, it generated a negative $561 million in cash flow from operations in the quarter. Peloton would run out of money in a few quarters at that rate. It's clear that the path is unsustainable, and Peloton needs to make some adjustments, which management indicated it would.
Already on Nov. 16, Peloton announced it would be selling enough stock at $46 per share to raise $1 billion. That will buy management more time, but it still needs to demonstrate that the business can be cash-flow positive again. Last year, Peloton made $312 million in cash from operations in the comparable quarter.
A new growth driver for Peloton?
Peloton launched the Tread in the U.S. on Aug. 30 and relaunched the product in Canada and the U.K. on the same date. It launched in Germany on Sept. 28 and plans to introduce the product in Australia soon. Much of the increase in expenses was due to the launch of this new, lower-priced Tread. Initial customer response has been great, with a net promoter score (NPS) of 89. To put that figure into context, NPS can range from negative 100 to 100, and the higher, the better.
The new product could serve as a growth driver for Peloton, which has, up until this point, relied on sales of its Bike to drive customer acquisition. Management only started promoting the product on Sept. 27, so it will take some time to become a meaningful business. Still, it's encouraging to see the initial positive response.
Should you buy Peloton stock?
The economic reopening has not been good for Peloton's business. In addition to slowing demand, supply chain disruptions have increased expenses and made it difficult to operate. Fortunately, those effects are likely temporary. Meanwhile, Peloton's long-run prospects remain intact. It offers a superior alternative to gym memberships. Exercising at home is more convenient than going to the gym, and management has proven progress on lowering the cost of its machines to make them accessible to more customers.
Moreover, Peloton is trading at the lowest price-to-sales ratio in the last two years -- lower than before the outbreak of COVID-19. Considering the negative cash flow and deteriorating balance sheet, investing in Peloton's stock is risky, but the upside makes the risk worthwhile.