Last year was a difficult one for connected-fitness business Peloton Interactive (NASDAQ:PTON). After skyrocketing 434% in 2020, when pandemic lockdown orders led to surging demand, the stock tanked 76% in 2021. Fulfillment delays, safety issues, and the economic reopening all contributed to Peloton's demise. 

At a price-to-sales ratio of 2.5 today, the lowest since the company became public, is Peloton a buy? Let's dive in and find out. 

Individual riding exercise bike in a home setting.

Image source: Getty Images.

Why Peloton is a buy 

If we isolate Peloton's subscription business, which generated $1 billion in revenue over the trailing 12-month period, then Peloton's stock currently trades at 10 times sales. For a fast-growing, high-margin, recurring-revenue business like this that has a competitive advantage in the form of a powerful brand and massive data collection, that's a very appealing valuation. Apple is making a big push in this area with its Fitness+ offering, but Peloton's celeb-like trainers have huge followings that can keep workout junkies engaged. 

This valuation exercise (no pun intended) doesn't include the hardware business, a segment that can be accretive to Peloton's profitability if operating costs are kept in check and there aren't any major price reductions in the near future. Connected-fitness subscribers, or those who purchased a piece of equipment and pay the $39 monthly fee, totaled 2.5 million as of Sept. 30. That figure has shown sequential improvement for 15 straight quarters, and it's up substantially from just 169,000 less than four years ago. 

The pandemic created the perfect environment for Peloton to thrive. Buyers of the stock would need to believe that demand for Peloton will still be strong in a more normalized world. This is the big unknown. Introducing new products, like the Tread, Guide, and possibly a rowing machine, should help expand the addressable market. Furthermore, continuing to penetrate international markets can help get a Peloton product into more households. 

Management previously set a goal of reaching 100 million subscribers one day. That's no doubt an audacious mission. But even if the business approaches a fraction of that number, it should make for a good investment. 

Why Peloton is a sell 

I believe the most important reason not to own Peloton stock is the intense competition in the industry right now. Consumers can purchase high-end, home-fitness equipment from the likes of Hydrow, Tonal, and Lululemon's Mirror. They can also go back to traditional brick-and-mortar gyms, like Planet Fitness. Peloton is no longer the only game in town. It's no wonder engagement, as measured by average monthly workouts per connected-fitness subscriber, dropped to 16.6 in the last quarter, the lowest level in a year and a half. 

To drive higher demand, the leadership team reduced the price of the flagship Bike from $1,895 to $1,495. Some might argue that this was a strategic move, but based on the timing, it looks more like a move done out of desperation. Peloton was already handling supply chain issues, a recall with its treadmill products, and decelerating growth. In the most recent quarter, connected-fitness revenue fell 17% year over year to $501 million. And management significantly cut full-year fiscal 2022 sales guidance from $5.4 billion to $4.6 billion (at the midpoint). 

After Peloton's fall from grace, I'm starting to appreciate just how hard it is to achieve sustainable success in the fitness world. Consumers run from one shiny product to the next. Peloton certainly has the brand name, exceptional user interface, and scale to do well, but it's fighting an uphill battle to keep its customers coming back to the platform day in and day out. This is far from a sure thing. 

Even with a more attractive valuation and a market cap of $10 billion today, I think the negatives outweigh any positive characteristics with Peloton. I'm passing on the stock right now. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.