Pop quiz! What company has a brand that nearly everyone knows, but whose stock has lost virtually all of its value in just one year? You would be correct if you guessed fitness equipment specialist Peloton Interactive (PTON -0.98%).
Now, everyone loves a good comeback story, which could certainly happen for Peloton. However, there are reasons why it may be better to wait things out for now.
Too many moving pieces
A company's stock typically doesn't fall more than 90% without serious problems, and big issues often bring significant changes. Peloton rose to glory during the pandemic, when lockdowns closed gyms and stimulus checks gave consumers plenty of money to try out its Bike product.
The business was growing fast. Revenue increased nearly 240% year over year at its peak, and management mistakenly thought this was a permanent upshift for the company. It announced plans to build a factory, hired people, and increased inventory to prepare for a surge in demand that never came.
The chart shows how this played out in the numbers. Revenue growth and free cash flow soared during 2020 and then imploded from 2021 onward.
PTON Revenue (Quarterly YoY Growth) data by YCharts.
This huge misstep caused numerous changes throughout the company. Co-founder and CEO John Foley stepped down, as did CFO Jill Woodworth.
Peloton also made a sharp pivot, abandoning plans to manufacture its fitness products and instead opting to outsource to a company in Taiwan.
It's excellent seeing action taken, but investors really have no way of knowing whether these changes will help or hurt, and the company will probably need at least a few quarters to give an indication one way or the other.
Will cash burn slow fast enough?
Peloton needs to quickly stop the financial bleeding. Free cash flow was negative $746 million last quarter. Plus, there's only $879 million in cash and short-term investments on the books, which gives the company enough cash for one or two more quarters before needing to raise money.
PTON Free Cash Flow (Quarterly) data by YCharts.
This is where it gets tricky for Peloton. Debt isn't a great option because interest rates have soared, and it already has $855 million in debt. Burying a struggling company in debt is not a recipe for success.
However, the stock's pummeling over the past year makes a stock offering unattractive, because a low share price means that Peloton would need to issue many shares to raise a meaningful amount of money. Adding tons of new shares makes existing shares worth less, which is not a good situation for Peloton or its shareholders.
Consumer purse strings might tighten
Meanwhile, the economy is doing Peloton no favors. Walmart just acknowledged that its stores would be heavily discounting apparel as consumers move away from discretionary spending to keep up with inflated prices on food and gas.
It's now summer, and it's easier to exercise outdoors or go to a traditional gym now that lockdowns are a thing of the past. It's challenging to envision high demand for an exercise bike that starts at $1,445 when people are putting off that new shirt they like from Walmart.
Maybe Peloton will shock Wall Street, and its changes will turn the ship around faster than expected. Ultimately, Peloton has become a "show me" story, and it's probably best to monitor the company before risking your money. The stock has already lost most of its value, so there's plenty of room to get in later if the fundamentals improve.
