After riding the pandemic to greater heights and a 434% stock-price gain in 2020, the once-booming leader in connected fitness, Peloton Interactive (PTON -2.08%), has gotten out of shape.
Production delays, safety issues, and waning demand have demonstrated a lack of competency by the management team, prompting a monumental sell-off of the shares and rumors about a possible acquisition. Most recently, drastic cost cuts and a new CEO have been announced.
Despite the huge amount of bad press hammering Peloton right now, current and prospective shareholders do have some reasons to be hopeful. Let's take a look at some reasons why Peloton's stock might actually be a good investment today.
Image source: Peloton.
Resetting expectations
While investing in turnaround situations can be extremely lucrative -- particularly because it's a contrarian bet when pessimism is sky high -- picking businesses that will indeed get back on track is not easy. In Peloton's case, hiring Barry McCarthy, formerly a CFO at both Spotify and Netflix, to replace John Foley as CEO presents a fresh opportunity to reset expectations.
Under Foley, who will become executive chairman of Peloton's board, the business significantly overestimated demand in a reopening economy coming out of the pandemic. About a year ago, Peloton was dealing with production delays due to soaring demand. This led it to spend $420 million to buy commercial-fitness manufacturer Precor as well as announce plans for a new $400 million facility in Ohio (an idea which has since been scrapped).
Bringing McCarthy in creates a chance to get management on the same page as Wall Street. And that means setting realistic expectations. For example, Peloton once again lowered guidance for revenue (to $3.75 billion) and connected-fitness subscribers (to 3 million) for fiscal 2022. Although painful in the short term, it's best that Peloton should underpromise and overdeliver instead of the opposite. Lower forecasts mean a greater chance for Peloton to surprise to the upside, which could boost the share price.
Selling a great product
Shareholders shouldn't forget just how fantastic Peloton's product offerings are. Nautilus, a competitor that sells home exercise equipment under the Bowflex brand, among others, has been around for decades. However, its market cap today is under $200 million, demonstrating that Peloton -- with its emphasis on building a wonderful user experience -- is doing something special.
Amid decelerating sales growth and mounting operating losses, two key metrics show underlying strength. In the most recent quarter ended Dec. 31, Peloton's connected-fitness churn (essentially, a measure of cancellations in a given period) was a healthy 0.79%. And the 12-month member retention was 92%. For reference, Costco, widely recognized as one of the most consumer-friendly businesses in the world, posted a membership renewal rate of 92% (in the U.S. and Canada) in its latest fiscal quarter.
Peloton's differentiator is its continued investment in content. Having celebrity trainers run highly engaging classes with popular music is all part of the Peloton experience. And it has created a budding community of fans. There are more than 450,000 members on the Official Peloton Member Page on Facebook.
At the end of the day, giving users an outstanding experience that is far better than what rivals offer is a major competitive advantage. Peloton needs to build on this strength by continuing to focus relentlessly on the customer.
Current valuation
Finally, a more modest valuation adds more potential upside to owning Peloton stock. The shares have fallen 76% over the past 12 months, and they now carry a price-to-sales ratio of 2.5, the cheapest multiple the stock has ever traded at in its short public history. As a result, it's not a stretch to say that investor pessimism is through the roof while optimism is close to non-existent. The market has a tendency of overreacting to both good and bad news, and this could very well be the case with Peloton today.
There are certainly risks to owning the shares. Demand might never rebound to its pandemic or pre-pandemic levels, and Peloton could prove to be just another fitness fad. Management might continue making poor capital-allocation decisions and burn through cash. And competition could intensify from both at-home fitness companies and traditional brick-and-mortar gyms.
But if you believe in the strength of Peloton's product offerings and think that a turnaround is likely, then buying the beaten-down stock now is an easy decision to make.
