Once a darling on Wall Street with its shares surging 434% in 2020 as a result of the coronavirus pandemic, Peloton Interactive (PTON -2.30%) has since fallen precipitously. Management overestimated demand in a reopening economy, inflating the company's cost structure, and the resulting challenges have led to big strategic changes being necessary to right the ship.
Peloton shares have fallen almost 70% year to date, and investor sentiment around the fitness stock remains very bearish. But with another major restructuring effort led by CEO Barry McCarthy, is now a good time to buy Peloton? Let's take a closer look at what investors should know.
Change is constant
On Aug. 12, Peloton announced more cost-cutting measures, choosing to outsource warehousing and last-mile delivery, close retail locations starting in 2023, and raise the price of the Bike+ and Tread. Shareholders shouldn't be surprised at this point, since the company has made move after move in 2022 to try and course correct. And at this point, with the stock down over 90% from its all-time high, management is pulling out all the stops to turn things around.
There are three specific points worth highlighting when it comes to the big changes happening at Peloton, particularly as it relates to the latest news. First, using third-party providers for warehousing and delivery is the second time the company has opted to outsource an important part of its operation. It previously decided to shut down all in-house manufacturing of its equipment. While this provides immediate cost savings by eliminating overhead expenses and allowing the company to scale costs based on demand, it will also put a lid on profit margins if the business starts growing again.
Second, Peloton's pricing strategy has been like a roller-coaster ride. In April, management decided to cut prices to help get rid of excess inventory. And now, the company has reversed course and upped the cost of the Bike+ by $500 and the Tread by $800. If you're a prospective customer, figuring out the optimal time to purchase a piece of Peloton equipment might be a more difficult task than trying to time the stock market.
Lastly, with the changes to its logistics and retail footprint, Peloton will once again lay off employees. This time around, 780 jobs will be lost, adding to the 2,800 workers that were let go as part of February's cost-cutting moves.
On a bright note, however, the market reacted positively to these changes: Peloton shares jumped more than 14% following the announcement.
A high-risk, high-reward stock
McCarthy and his team are doing everything they can to stop the financial bleeding. Over the last four fiscal quarters, Peloton's cumulative net loss was a whopping $1.9 billion. And with fiscal fourth-quarter revenue expected to be down about 28% year over year, more losses are on the way. Nonetheless, the goal is to achieve positive free cash flow starting in fiscal 2023, but in order for this to plausibly happen, demand also needs a huge boost, which at this point is a massive question mark.
Peloton shares currently trade at a price-to-sales ratio of less than one, the cheapest the stock has sold for in its short history. In the risk-averse market environment we've seen in 2022, I think it's safe to say investors just don't have the appetite to own a struggling business like Peloton.
Therefore, I view it as a high-risk, high-reward investment. If you have faith in McCarthy's turnaround strategy and Peloton shows fundamental improvements when the company announces fiscal fourth-quarter results on Aug. 25, then that may be a signal for investors to buy in.
But as Warren Buffett has previously noted, "Turnarounds seldom turn." Investors should understand the risk involved here as things could definitely get worse for Peloton before they get better.