Shares of Peloton Interactive (PTON -1.89%) have been in a steep downward spiral since early 2021, falling more than 90% from their peak. Before that, the stock racked up incredible gains in 2020 as investors emotionally bought stocks that might benefit from pandemic-driven social distancing.
Even though investors are now taking a more rational view here, Peloton is still not a great option for most investors. Here are three reasons.
1. It's nothing special
At its core, Peloton Interactive is a fitness equipment maker. That's not a new business model by any stretch of the imagination.
To be fair, it does wrap some neat technology around its equipment that lets subscribers take live classes with others, or retake previous classes as if they were live, and (perhaps most interesting) compare themselves to other class members. There's more to the technology than that, of course, but suffice it to say, the subscription service has some desirable features.
And yet the core of the product is still just fitness equipment. There's the old joke about an exercise bike turning into a clothing rack. It's funny because, well, it's true. Eventually most people just lose the early enthusiasm and stop using their shiny new toy.
That's apparently happening now for Peloton with the company reporting a huge 26% year-over-year drop in per-customer sessions in its fiscal fourth quarter. That slowdown could lead to a full stop for many -- and then, quite possibly, subscription cancellations.
This trend does not appear to be Peloton's friend. And that doesn't even take into consideration the fact that competitors have come in with products that are similar and often cheaper.
2. It has no profits
Peloton is a young company as it only held its initial public offering (IPO) in late 2019. While that was seemingly perfect timing to benefit from the 2020 pandemic, there's really not much financial history to go on. And what history there is, isn't very inspiring. The company has lost money in each year of its public life.
The red ink at the bottom of the income statement was particularly hard to look at in fiscal 2022, which ended in June. The company lost a massive $8.74 per share, much worse than the $0.64 per share loss in fiscal 2021. The big culprits were one-time charges, including impairment and restructuring expenses. Remember, this is a company that's only been public for a few years. Having to take massive charges so early in the company's public life is not a good sign.
You can argue that Peloton is still in its growth phase, but at some point even a cool product needs to turn a profit if it wants to stick around.
3. The special situation
So Peloton has a neat product offering that isn't making money, but in the right hands it could be a valuable property. For example, a company like Amazon (AMZN 1.44%) could bundle the product into its subscription services to either make Amazon Prime more attractive or as a new subscription of its own. Indeed, Peloton could be a very attractive addition to a larger product portfolio.
Note that Lululemon Athletica bought Mirror in 2020, a fitness system that uses a mirror to interact with users. It's the same basic idea. And the Amazon reference isn't random. Peloton just inked a deal to sell its fitness equipment with the online retailer. It wouldn't be too shocking if that led to a bigger announcement down the road.
While hope springs eternal, most investors shouldn't buy a stock based on the offhand chance that it could be acquired. In fact, such special situations are really only appropriate for the most aggressive investors, since there's no way to judge how likely such an outcome really is. So while it's fun to speculate on such matters, conservative investors shouldn't get caught up in conjecture.
The bad news outweighs the good
Basically, investors always have to balance risk against reward. While Peloton's massive stock price decline does reduce risk in some ways, the fundamental story here is still not particularly alluring: a neat but undifferentiated fitness product that is already seeing customers lose interest and ongoing red ink.
Perhaps its best hope for the future is the very hard-to-predict chance that Peloton gets bought out. But most investors, particularly those with a conservative bias, should probably stay away from Peloton right now.