Peloton Interactive (PTON +1.89%) was one of the hottest stocks during the worst of the pandemic. After hitting a March 2020 low of $19.72 per share, it had rocketed to nearly $163 by December of the same year. But that's where the run ended, and Peloton stock has now settled below $10.
Why? The issue is two-sided. People have a lesser need for Peloton's at-home exercise equipment now that COVID-19-related social restrictions are lifted, which has decimated the company's revenue. Plus, the company's expenses were heavily bloated as it planned for more growth that never came.
Falling revenue with rising costs led to one disastrous outcome: A company fighting for survival. While Peloton's results for the fiscal first quarter of 2023 (ended Sept. 30) showed some improvement, here's why I'm not a buyer this November.
NASDAQ: PTON
Key Data Points
Tackling Peloton's problems
Earlier this year, Peloton appointed a new CEO, Barry McCarthy, who brought a bold, optimistic vision to the company. His first task was securing Peloton's survival, because as a business, its losses were ballooning, and it was quickly running out of cash.
In an effort to reduce costs, Peloton slashed its workforce in just about every department and it even shut down its in-house manufacturing operations in favor of outsourcing. The company also took out a $750 million loan to shore up its balance sheet and provide some breathing room while management turns the ship around.
Unfortunately, this hasn't resulted in much improvement in Peloton's bottom-line losses because the company's revenue continues to decline, offsetting the cost-cutting efforts. That raises the new CEO's next challenge: reigniting growth.
Peloton always sold its products directly to consumers through its website or its physical stores. But in an attempt to reach more customers, it recently decided to sell through e-commerce giant Amazon and Dick's Sporting Goods, which also helps to reduce some of its own sales costs.
McCarthy envisions a future where Peloton has over 100 million connected fitness subscribers using its virtual classes. It has just shy of 3 million right now, and even if its first-quarter growth rate of 19% (year over year) remains constant, it would take over two decades to get there. The other problem is the growth rate is decelerating -- just two quarters ago, it was 42%.
Peloton's sales are collapsing
It's no secret the economic environment is deteriorating right now thanks to soaring inflation and rising interest rates. Those factors could lead to a prolonged reduction in consumer spending, especially on the sort of big-ticket items Peloton sells. The company just released a new rowing machine, for example, priced at $3,195.
Peloton's quarterly revenue has been lumpy at best over the last couple of years. But it declined sharply over the last three consecutive quarters, which is telling of consumers' appetite for its equipment.
Now that gyms are open and people are better able to conduct outdoor activities, demand for Peloton's products will likely remain suppressed. The upcoming winter season in the U.S. might be a positive for the company as consumers spend more time indoors, though seasonality is unlikely to resurrect Peloton's share price.
Peloton's cash position is cause for concern
Peloton's mission to right-size the business and return to growth is riddled with challenges, but I've yet to mention the biggest one: time. The company currently has $938 million in cash available, but it posted a net loss of $408 million in the first quarter of fiscal 2023, and that followed $2 billion in net losses in the prior two quarters (combined).
Even if Peloton's losses don't grow worse, its most recent $408 million quarterly loss dictates that the company's $938 million cash balance will be exhausted in fewer than three quarters.
The outlook for the upcoming second quarter of fiscal 2023 doesn't look promising, as Peloton's revenue is expected to remain flat at $616 million, which could result in more red ink on the bottom line.
Peloton stock has declined by 94% from its all-time high, but given the heightened uncertainty that lies ahead, that's not a dip I'm buying right now.
