Is Peloton Interactive Stock a Buy?

Peloton Interactive (PTON 4.29%) is arguably the poster child for broken, pandemic-era growth stories. The connected exercise bike maker went public at $29 per share in Sept. 2019, but its stock opened at just $27 and dipped below $20 the following March as investors questioned the appeal of its pricey exercise bikes and subscription-based remote spin classes.

However, the pandemic subsequently lit a fire under Peloton's business as gyms closed down and more people stayed home. In fiscal 2020, which ended in June of the calendar year, Peloton's revenue doubled to $1.83 billion, its total number of connected fitness subscribers more than doubled to 1.09 million, and its total number of workouts more than tripled.

Image source: Peloton.

That momentum continued in fiscal 2021. Peloton's revenue surged another 120% to $4.02 billion, its connected fitness subscribers jumped 114% to 2.33 million, and its total number of workouts nearly tripled. As a result, Peloton's stock soared to an all-time high of $167 last January.

But today, Peloton's stock trades at a mere $8 a share. The bulls rushed for the exits as its growth decelerated in a post-lockdown market, more competitors entered the ring, and it fumbled the launch of its connected treadmills with a disastrous recall. The resignation of its CEO, thousands of job cuts, and price reductions for its namesake bike also indicated it was in deep trouble -- and rising interest rates exacerbated its steep sell-off. 

Nevertheless, contrarian investors might still be wondering if Peloton, which now trades at less that one times this year's sales, is now a deep value play. Let's take a fresh look at its business to find out.

How bad was Peloton's post-pandemic slowdown?

Peloton's year-over-year growth in connected fitness subscriptions, total workouts and total revenue all decelerated significantly over the past year.

Data source: Peloton.

Analysts expect Peloton's revenue to decline 11% to $3.59 billion for the full year, but rise 5% to $3.76 billion in 2023.

In addition to challenging comparisons to the pandemic, Peloton faces competition from cheaper connected exercise bike makers like Echelon, other connected fitness products like Lululemon's (LULU 1.31%) Mirror, and subscription-based remote fitness programs like Apple (AAPL -0.35%) Fitness+. That intense pressure prompted Peloton to reduce the prices for its bikes, expand its product line with treadmills, and introduce new fitness programs which didn't require any of its first-party equipment.

However, that strategic shift also significantly reduced Peloton's gross and adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margins -- even after it cut 2,800 jobs, or approximately 20% of its workforce, earlier this year.

Data source: Peloton.

On a GAAP (generally accepted accounting principles) basis, Peloton posted a staggering net loss of $1.52 billion in the first nine months of fiscal 2022, compared to a net profit of $124 million in fiscal 2021.

To stop that bleeding, Peloton recently announced that it would halt manufacturing its own products and instead outsource all of its production to Taiwanese manufacturer Rexon Industrial.

That big change might help Peloton gradually narrow its losses, but analysts still expect the company to incur an adjusted EBITDA loss of $806 million in fiscal 2022 -- compared to a positive $254 million in fiscal 2021. However, they also expect it to narrow that loss to $114 million in fiscal 2023 as it aggressively reins in its spending.

We should take those expectations with a grain of salt, especially since a recession would likely prevent consumers from buying Peloton's expensive bikes -- which still cost at least $1,445 after its latest price cuts.

Peloton isn't a turnaround play yet

Peloton's lack of profits and its elevated debt-to-equity ratio of 1.5 will make it an unappealing investment as interest rates climb, but it probably won't go bankrupt within the next few quarters. It still ended its third quarter of 2022 with $879 million in cash and cash equivalents, and it hasn't drawn a single dollar from its $500 million revolving credit facility yet.

However, I can't recommend buying Peloton until its revenue growth and margins actually stabilize. Its shares might look dirt cheap right now, but it still hasn't attracted any serious takeover interest from companies like Apple or Nike -- which were both cited as potential suitors in the past -- even at its current enterprise value of just $4.2 billion. Simply put, investors shouldn't consider Peloton a deep value play just yet.