2022 has started out as a tough year for investors. This is especially true for shareholders of Peloton (PTON -0.22%), which is down over 70% in the last 12 months. The company, which was a stock market favorite during the beginning of the pandemic, has lost its footing over the past six months and now faces a massive inventory problem. What's worse, many investors have lost confidence in the company, hurting its ability to raise money through common stock offerings.
With all these factors coming together, Peloton has started burning cash rapidly, leading to fears that it could run out of money if the company can't rebound within one to two years. Does this mean Peloton stock is in a death spiral? Let's find out.
Things have gone from bad to worse
Peloton stock has crumbled for many reasons, but the most important was management greatly overestimating demand for its fitness products coming out of the pandemic. In April 2021, the company acquired competing fitness equipment maker Precor for $400 million to boost its manufacturing capacity. On top of this, it laid the groundwork for its Peloton Output Park in May, its own manufacturing hub in Ohio that will greatly increase its production capacity. The facility is scheduled to go live in 2023, and the company is expected to spend $400 million on the project.
All this spending on manufacturing capacity sounds great in theory, but the problem is that demand for Peloton's products has cratered. Rumors had been circulating for months, but things culminated in early 2022 when CNBC obtained internal documents from the company outlining its plan to pause all Bike production in February and March. Production of Bike+ (its more expensive cycling offering) was already suspended in December and will not restart until June. Even the company's other products like the Tread and Tread+ (its treadmill product line) are on hold for six weeks and the rest of fiscal 2022, respectively.
Peloton stock dropped almost 25% on the news as the halted production confirmed investors' fears that demand for the company's fitness products has fallen out of favor. If customers don't want bikes and treadmills, they will just sit on Peloton's balance sheet, and the company will likely see a slowdown in connected fitness subscriber growth (which its long-term business model relies on).
With Peloton's most recent quarter (the three months ended Dec. 31, 2021), investors could see the slowdown starting to take effect. Revenue growth decelerated to just 6% year over year while operating expenses jumped 93% year-over-year. Inventory also jumped from $937 million to $1.54 billion between June and December. Since then, these trends have likely worsened.
From a cash flow standpoint, Peloton is now heavily in the red with a trailing 12-month free cash outflow of $1.4 billion as of September. You can take this as an approximate estimate of how much cash Peloton is burning each year. Again, if inventory troubles have gotten so bad it has planned to halt production, this cash flow number is likely much worse right now.
It should be noted that John Foley, CEO and founder of Peloton, claimed in a letter that the reports about halting production are false. The story is turning into a bit of a "he said, she said" debacle, but it's tough to entirely dismiss the report when CNBC and other major news outlets obtained internal documents dated just 10 days before the story broke. In my opinion, Foley may either be lying about Peloton's plans, or he decided to reverse course after the story dropped. Either way, it is not the best look.
This isn't the first time the company has been suspected of playing with the truth. On its earnings call in November, when asked about the need to raise money, Chief Financial Officer (CFO) Jill Woodworth said, "[W]e don't see the need for any additional capital raise based on our current outlook." But two weeks later, the company announced a common stock offering with net proceeds of $1.22 billion.
And now, we've recently learned that shareholders have had enough of these antics. On Feb. 8, in conjunction with its earnings release, Peloton announced that Foley would be stepping down from his CEO role. He is being replaced by Barry McCarthy, former CFO of Netflix and Spotify.
Verdict: Is Peloton toast?
Even with the company in such a tight spot right now, it's tough to say with any certainty whether Peloton is headed for bankruptcy. It could definitely happen, as the company has less than $2 billion on its balance sheet after the capital raise that it will likely exhaust in one to two years at the current burn rate. If this doesn't get fixed, and Peloton never heads back to generating positive cash flow, Peloton stock could have much further to fall. How likely this is, I don't know.
But with Foley and possibly the rest of the executive team out, this creates more uncertainty for this business moving forward. Add this to the inventory woes, growth deceleration, and cash burn, and it is hard to find a reason to own Peloton stock right now, even with shares down over 80% in the last 12 months.