Not long ago, Peloton Interactive (PTON -0.98%) was a popular darling on Wall Street, but its shares have come crashing down from the high they set in December 2020. The innovative maker of connected at-home fitness equipment has seen its stock crater by 92% from that peak, and its market cap -- which once approached $50 billion -- stands at just $4.7 billion as of this writing.
A combination of weakening demand and over-investment in manufacturing and inventory has left this consumer discretionary business in a tough financial situation. So to shore up its balance sheet, management just raised $750 million in debt. Navigating what could be a difficult few quarters so that it can ultimately get on the road back to profitability is the company's primary goal right now.
But should this debt sale be viewed as a sign of trouble for Peloton?
Pedaling toward financial fitness
Over its past four reported fiscal quarters, as Peloton's revenues fell, it produced a combined net loss of $1.9 billion. Clearly, a model that's generating results like these is not sustainable -- any business in such a situation that failed to make the adjustments necessary to get out of it would eventually find itself in bankruptcy.
New CEO Barry McCarthy has put much of his focus on strengthening the company's balance sheet as he tries to orchestrate a turnaround. With the capital infusion from this recent debt sale, Peloton has about $1.6 billion in cash and cash equivalents on its books.
Management expects the business to generate positive free cash flow again in its fiscal 2023, which starts July 1. Making cuts that will yield $550 million in total cost savings, selling more of the (excessive) $1.4 billion worth of inventory it had in stock (as of March 31), and lowering its capital expenditures will be the key aspects of its effort to achieve that goal.
Of course, finding ways to grow the customer base, now at 2.96 million connected-fitness subscribers, will be of the utmost importance. Lowering the price of the Bike, Bike+, and Tread might help attract more price-sensitive consumers. In addition, there's its "One Peloton Club" offering, which offers people the option to rent a piece of exercise equipment and get a workout membership for a low monthly fee. As the company expands its test of that offering to additional markets, it will provide more people with a chance to try out the Peloton experience, and could reduce purchasing friction.
Image source: Peloton Interactive.
The right move at a tenuous time
Peloton's capital raise of $750 million amounted to about 16% of the company's market cap as of May 31. That sort of debt burden may not be what investors want to see from the businesses in their portfolios, but it might be absolutely necessary for Peloton right now.
While I believe the beaten-down shares present an attractive buying opportunity today, there is still a ton of near-term uncertainty that this business will have to overcome. Finding ways to spur demand for its exercise equipment -- even as more people are returning to gyms -- and turning its financial picture around are, unsurprisingly, at the top of Peloton's to-do list.
Additionally, the Federal Reserve plans to hike benchmark interest rates steadily through 2022 and into early 2023 to curb high inflation. But if central bank officials don't tighten the money supply with just the right degree of finesse to deliver a soft landing for the economy, they could tip the U.S. into a recession. Given the possibility of this type of economic scenario, I think Peloton's move to upgrade its cash position now makes sense.
Would-be shareholders should proceed with caution when it comes to investing in this struggling business. Only buy the stock if you believe McCarthy and his team can institute a turnaround. Even if they can, your patience will certainly be tested along the way.
