With the S&P 500 down 17% in 2022 and fears swirling about a possible recession, it is definitely a scary time to be a stock market investor. While the initial reaction might be to sit on the sidelines for a more positive economic outlook, it's best to simply stay focused on the long term and to consistently add savings to your portfolios.
Even what might seem like a small dollar sum can still help you reach your financial goals. So if investors only have $100 to put in the market right now, I think Peloton Interactive (PTON -4.28%) deserves some attention.
Trying to fix big problems
To say that the coronavirus pandemic supercharged Peloton's business would be an understatement. Restrictions forced people to find ways to work out from the comfort of their homes. And the company benefited greatly from this trend, registering four straight quarters of more than 125% year-over-year revenue growth during the depths of the health crisis.
But management wrongfully expected the surge in demand to continue even as the economy reopened, planning to bolster manufacturing and logistics capabilities. When restrictions eased, Peloton faced a different reality than it had hoped. Sales growth fell off a cliff, and the losses mounted. Just last quarter (ended March 31), the company posted a net loss of $757 million.
The new CEO, Barry McCarthy, is trying to fix the situation. He announced a major restructuring program aimed at getting costs under control. Outsourcing manufacturing, selling off excess inventory, and trimming marketing expenses are part of the solution that can help Peloton generate positive free cash flow starting in fiscal 2023.
Probably the most important strategic pivot that McCarthy is trying to implement is transitioning Peloton from primarily a hardware business to one that emphasizes subscriptions. Selling equipment is a one-time transaction, but the valuable recurring revenue of a subscription model can support Peloton's long-term viability. In the most recent quarter, monthly churn for its connected-fitness business was 0.75%, which is pretty remarkable and signals that once customers join the Peloton ecosystem, they become hooked.
Still the industry leader
With trailing 12-month revenue of $3.8 billion, Peloton is the clear leader in the at-home fitness market, which is impressive given the fact that the company was started as recently as 2012. Nautilus, a direct competitor with an operating history that spans almost four decades, generated trailing 12-month sales of just $590 million. What's more, even with Peloton's monumental stock-price decline, its market cap of $3.3 billion easily trumps Nautilus' $60 million.
Peloton arguably has the best combination of hardware and software in the industry. And its instructors, many of whom have become somewhat of celebrities with huge followings, help make the workout content incredibly exciting, addicting, and effective for Peloton's 7 million total members. A wide range of exercise categories, from yoga and boxing to strength training and meditation, are offered.
The company's value proposition is strikingly clear, centering on fun and convenience, and customers appreciate it. In Peloton's 2019 S-1, a document private companies file with the Securities and Exchange Commission before going public, it was mentioned that four out of five members weren't even in the market for a home-exercise equipment before purchasing a connected-fitness bike or tread. This shows how Peloton is expanding its addressable market opportunity.
Helping to achieve more growth and drive higher demand, something shareholders desperately want right now, will be the introduction of new products and penetration of new markets. It has been reported that Peloton is planning to sell a rowing machine, expanding its hardware lineup. And the business launched in Australia about a year ago. Making further inroads in the populated Asia-Pacific region could prove lucrative over the long term.
Investors who buy shares of Peloton today are certainly betting on a turnaround to happen. But the new CEO is making the right moves, and the company is still at the top of its industry. This is a higher-risk investment than buying stock in more established and mature businesses, but the potential payoff for shareholders is huge.