Peloton Interactive (PTON +1.39%) became one of the hottest growth stocks during the pandemic as the temporary closures of gyms boosted sales of its connected exercise bikes and subscriptions. However, growth subsequently stalled out as the pandemic lessened, gyms reopened, and more competitors entered the connected fitness market.
As a result, Peloton's stock plummeted from its all-time high of $167.42 last January to about $8 today. That's also far below its IPO price of $29. Some value-seeking investors might think Peloton looks cheap at less than one time this year's sales, but I'd still avoid it for five simple reasons.
Image source: Peloton.
1. It will drown in a recession
If inflation, rising interest rates, and other macroeconomic headwinds spur a global recession, consumers will have a lot less disposable income to lavish on Peloton's pricey bikes, treadmills, and subscription-based services.
When Peloton went public back in late 2019, its original Bike cost $2,245 and the newer Bike+ cost $2,495. Its customers also needed to pay monthly subscription fees to access its remote cycling classes. Today, Peloton's original Bike costs only $1,445, but its Bike+ is still priced at $2,495, and its newer Tread+ treadmill costs a whopping $4,295.
Those high prices leave Peloton exposed to competition from cheaper exercise bike makers like Echelon, makers of full-body workout devices like Lululemon's (LULU +2.68%) Mirror (which costs $1,495), and providers of stand-alone streaming workout services like Apple's (AAPL +2.59%) Fitness+. The ongoing fragmentation of that connected fitness market will cause even more headaches for Peloton in a recessionary environment.
NASDAQ: PTON
Key Data Points
2. Its growth has stalled out
In fiscal 2020 (which ended in June of the calendar year), Peloton's revenue doubled to $1.83 billion, its gross margin expanded from 42% to 46%, and its net loss narrowed from $196 million to $72 million.
In fiscal 2021, its revenue surged 120% to $4.02 billion, but its gross margin declined to 36% and its net loss widened to $189 million. It attributed that margin compression to the safety-related recall of its Tread+ treadmills, price reductions for its original Bike, and higher component and freight costs.
In fiscal 2022, Peloton's revenue declined 11% to $3.58 billion, its gross margin plunged to 19%, and its net loss widened to a whopping $2.8 billion. Its growth decelerated as it lapped the pandemic and faced more competitors, and it continued to grapple with high supply chain costs.
Analysts expect Peloton's revenue to decline another 15% to $3.06 billion in fiscal 2023 as it posts a narrower net loss of $675 million. However, they still expect it to remain unprofitable for the foreseeable future.
3. It lacks stable leadership
As Peloton faces its first major test as a public company, it needs stable leadership with a consistent vision for the future. However, co-founder and CEO John Foley stepped down this February, then vacated his executive chairman position in mid-September. Three other top executives -- co-founder and Chief Legal Officer Hisao Kushi, Chief Commercial Officer Kevin Cornilis, and Chief Marketing Officer Dara Treseder -- also recently left the company.
Foley's successor, Barry McCarthy, laid off over a fifth of Peloton's workforce, outsourced its production to Taiwanese manufacturer Rexon Industrial to cut costs, and started selling its products on Amazon (AMZN +0.26%) in a drastic departure from its direct-to-consumer strategy. Those moves might gradually stabilize its margins, but it's still unclear how the company plans to grow its revenue again as it faces inflationary, recessionary, and competitive challenges.
Peloton initially reduced the prices of the Bike+ and Tread in April, but its revenue still declined year over year in the second half of fiscal 2022. To protect its margins, it reversed those discounts in August while raising its monthly subscription fees in the US and Canada -- but those strategies could merely exacerbate its post-pandemic slowdown.
4. Insiders aren't buying any shares
If Peloton had a shot at turning around its embattled business, then its insiders would likely be scooping up shares at a steep discount to its IPO price. But over the past three months, they haven't bought a single share.
5. Potential buyers haven't appeared
Lastly, analysts had speculated earlier this year that Apple, Amazon, or Nike could swoop in and buy Peloton. But it's lost more than 90% of its value over the past 12 months, and no serious buyers have emerged -- even though Peloton's current market cap of $2.8 billion is now lower than its projected sales of $3.1 billion this year.
Don't ignore these red flags
All these problems indicate Peloton could be headed down the same path as GoPro, which vastly overestimated the growth potential of the premium action camera market, and Fitbit, which was eventually bought by Alphabet's Google after failing to stay relevant in the commoditized fitness tracker market.
Therefore, Peloton's stock could slowly bleed out instead of staging a long-term recovery. Investors should stick with more promising stocks until it properly stabilizes its business.
