Shares of Peloton Interactive (PTON +0.85%) were trading as high as $171 at the beginning of 2021, but they now trade for under $10. A few years ago, Peloton was experiencing surging demand for its connected fitness products, but the company's business has turned upside down as people return to their pre-pandemic routines.
NASDAQ: PTON
Key Data Points
The biggest problem for the company is not weakening demand but worsening profitability. Peloton reported a massive $2.8 billion in net losses on just $3.6 billion in revenue for fiscal 2022 (ended in June).
However, you're probably reading this, because you sense a potential opportunity to buy the stock cheap before the company turns itself around. After all, Peloton still has a solid brand and a new CEO who previously helped guide Netflix through its first decade of growth as chief financial officer.
Here's what Peloton must do to restore investor confidence.
Stabilize revenue
The first thing that should instill some confidence in Peloton's future is to ensure it is still serving a need in the marketplace. While many people will always prefer a gym over working out at home, Peloton's 2.96 million connected-fitness members say there are plenty of prospective customers who want a convenient at-home solution. This is good news since Peloton has emerged as the brand to beat for the competition.
The problem for investors is that revenue is still falling. For fiscal 2022, it fell 11% with the weakening economy putting more and more pressure on the company as revenue declined 28% year over year in the fourth quarter to cap off the fiscal year.
Data by YCharts.
Can Peloton stabilize its top line? Yes, but the spike in revenue during the pandemic was not a normal demand environment. What is happening now is a sales correction as business reverts to pre-pandemic trends.
When does the correction end? To get an idea of when Peloton's revenue could stabilize, let's look at the three-year trend in average monthly workouts per member, which have been closely correlated with revenue performance.
In the June-ending quarter of fiscal 2020, at the very height of the stay-at-home environment, Peloton's average monthly workouts per subscriber reached 24.7. With a nasty virus floating around, buying a Peloton was a popular option for staying in shape at home. Revenue doubled that year, and the stock soared to the moon.
In the most recent quarter, average monthly workouts per subscriber dropped to 14.8. This is closer to pre-pandemic levels in fiscal 2019 when average monthly workouts stood at 12. The recent decline in this metric also corresponds to declining interest in Peloton Bikes and subsequent decreases in revenue. It's possible that interest in Peloton's products could hit a floor as this metric reaches 2019 levels, but nothing is guaranteed with consumers tightening their wallets right now.
Chart by author. Data source: Peloton Interactive.
In a normal economic environment, investors could expect revenue to stabilize soon, but the uncertainty with inflation and consumer spending makes it difficult to know when revenue will stop falling.
While it's important for Peloton to get back to breakeven on the bottom line, new CEO Barry McCarthy sees revenue growth as a top priority. "It's not enough to just cut expenses," he said during the fiscal fourth-quarter earnings call in August. "We have to grow revenue."
The fact that average monthly workouts per member is 23% higher than it was three years ago is very encouraging. It indicates that as Peloton continues to expand its content offerings and the number of workout classes available on the Bike and Tread, it is seeing members gradually use their machines more as part of their regular workout schedule.
The idea of growing engagement and subscriptions through investing in more content is right out of McCarthy's background working at Netflix from 1999 to 2010. This will be vital to Peloton's growth strategy.
However, the company's mounting losses make it more difficult for Peloton to invest in new products and content to attract users. It ended fiscal 2022 with $1.3 billion in cash and equivalents after burning through $2.4 billion of free cash flow during the year. And Peloton clearly hasn't found revenue stability yet, so management still has plenty of work to do to get the business back to breakeven.
There is hope for Peloton. It can even be a growth stock again, but the clock is ticking. I would not buy into this as a turnaround play until Peloton shows the bleeding has stopped.
