When one looks back on the history of the stock market and how it performed during the coronavirus pandemic, there probably won't be a more emblematic business to look at than Peloton Interactive (PTON 3.61%). The at-home fitness equipment maker soared 434% in 2020 and almost reached a market cap of $50 billion, only to come crashing down since. As of this writing, the stock is down 94% from its peak, and the business is worth $3.2 billion.
When people were stuck at home and needed a way to work out, demand for Peloton surged. Management, however, mistakenly extrapolated heightened consumer interest in a more normalized world. The result has been sluggish sales, mounting losses, and a company that has fallen significantly out of favor with Wall Street.
Despite these troubles, I believe there are two important reasons investors should consider buying this consumer discretionary stock now. Let's take a closer look.
Fantastic products and user experience
First and foremost, Peloton's lineup of products, which includes the flagship Bike, Bike+, Tread, Guide, and an upcoming rowing machine, is absolutely adored by customers. According to the company website, the Bike, for example, has an average rating of 4.8 stars out of five from nearly 20,000 different reviews. What's more, the Net Promoter Score of 64 is higher than other consumer favorites like Netflix, Costco, and Apple.
Peloton spent $275 million on research and development in the past nine months, representing just under 10% of total revenue. Management knows that in order to continue keeping current and prospective customers excited, they need to find ways to innovate the product and content offerings. From just a consumer standpoint, these investments are working, as monthly connected-fitness subscriber churn continues to remain well below 1%.
The company's 7 million members have access to an unlimited number of classes ranging from 11 different disciplines, including cycling, strength, and yoga. Some of Peloton's instructors have become celebrities thanks to their huge followings. And the business has found a way to create a strong sense of community. There are almost 470,000 members on the "Official Peloton Member Page" on Meta Platforms' Facebook.
Peloton isn't just attracting the serious workout fanatic, either. According to the company's S-1 filing from late 2019, four out of five connected-fitness subscribers weren't even in the market for home exercise equipment before making a purchase. The business is clearly expanding its addressable market.
If you need more convincing of just how exceptional Peloton's offering is, then look at a direct competitor like Nautilus. The maker of exercise equipment under the Nautilus and Bowflex monikers (among others) has been around since the mid-1980s. But today, the company carries a market cap of just $64 million and generated $590 million in trailing 12-month sales. That pales in comparison to Peloton's last 12-month revenue of $3.8 billion.
Bolstering the financial position
With a cumulative net loss of $1.9 billion over the past four quarters, many investors are unsurprisingly concerned that Peloton simply won't be able to survive for much longer, especially if the U.S. enters a recession as many expect we might. Peloton's previous management team, led by co-founder and then-CEO John Foley, overinvested during the pandemic with the expectation that surging demand would continue even as the world reopened and people would go back to gyms again.
Faced with a glut of inventory on hand, the company has halted plans to open its Ohio manufacturing facility and has cut prices on its equipment. New CEO Barry McCarthy brings experience as a CFO to the business. He has implemented a major restructuring plan to cut costs on things like logistics and marketing while reducing capital expenditures. And the company recently raised a $750 million term loan to bolster its balance sheet. The goal is to generate positive free cash flow starting in fiscal 2023.
Another key factor in helping turn things around is McCarthy's emphasis on growing the subscription side of the business. His previous stints at Netflix and Spotify are on full display here. Increasing the lifetime value of customers by playing around with hardware and subscription prices to get Peloton equipment into as many homes as possible could be a major boon for the company over the long term.
The pessimism surrounding Peloton's business and stock has never been higher. But with a truly great hardware and software offering, as well as a new CEO who is making moves to right the ship from a financial perspective, I think the potential for solid returns is there for investors who are willing to buy the dip and exercise patience.
