A company that was once seemingly on top of the world, Peloton Interactive (PTON -5.61%) has had a rough year in 2022. The stock has fallen 71% as the business grapples with a list of issues that are being exacerbated by a slowing economy. The future for the company couldn't be more uncertain.
Should investors buy, sell, or hold Peloton's stock as we look toward 2023? Here's how I view the situation.
A tumultuous time
A worthwhile discussion about Peloton's investment merits can't happen without addressing the problems first. The business benefited greatly from the coronavirus pandemic, as people who were stuck at home, coupled with closed gyms, created a demand boost. There was a four-quarter stretch from Q4 2020 through Q3 2021 when Peloton posted year-over-year revenue growth in excess of 125%.
The previous CEO, John Foley (also a co-founder), chose to invest heavily to expand the company's manufacturing capacity. Peloton bought Precor for $420 million in December 2020 and planned a new $400 million production facility in the hopes that the demand craze for bikes and treadmills would continue indefinitely.
Clearly, this was a mistake. Gyms opened back up amid easing restrictions, and consumer behavior started getting back to normal. Planet Fitness, a massive chain of low-cost gyms, counted 16.6 million members as of September 30, a record for the company. Sales also hit an all-time high in the quarter.
Peloton's revenue growth started to slow as excitement for its products waned. Sales declined more than 20% on a year-over-year basis in each of the past three quarters. And over the past seven fiscal quarters, net losses totaled $3.6 billion. Making matters worse is falling engagement. In Q4 2022, average workouts per month dropped 26% year over year. In the latest quarter, Peloton stopped reporting this metric, a sign that it's surely trending way down.
As a result, Peloton's market capitalization has cratered, from a peak of nearly $50 billion in January 2021 to $3.5 billion now. And the new CEO, Barry McCarthy, has his work cut out for him to try to get the company back in shape.
Is a turnaround likely?
If investors are keen on buying Peloton now, they must be convinced that the business can turn things around and improve the situation in 2023. Right now, however, I see no evidence of this actually happening. As Warren Buffett, who many consider to be the greatest investor ever, is known for saying, "Turnarounds seldom turn." This might be the right perspective when thinking about owning Peloton's stock.
In an effort to spur demand, management has tweaked pricing multiple times throughout the year. One of McCarthy's innovative decisions was to introduce a rental program that lets customers pay a single monthly fee for the Bike, Bike+, or Tread and the workout membership with the option to buy the product after 12 months at a reduced cost. But this hasn't moved the needle much as the business only added 8,000 net new connected-fitness subscribers in the quarter.
To McCarthy's credit, he has inked partnerships to sell Peloton products on Amazon and at Dick's Sporting Goods, broadening sales channels. And Peloton bikes will be in every Hilton hotel in the U.S.
Furthermore, a new rowing machine (called the Row) was added to the product lineup to drive sales. However, it might seem like a questionable idea given that Peloton currently has $993 million of inventory on its balance sheet. And I suspect the addressable market for rowing machines is smaller than that for treadmills and bikes, so investors probably shouldn't expect a meaningful impact to revenue anytime soon.
In fact, the Row could worsen the company's financial situation, by tying up much-needed liquidity to develop and launch a new product when existing products aren't selling like they need to now. And if we go into a full-blown recession next year, Peloton will find itself running out of cash as consumers will surely cut discretionary spending.
I think the negatives far outweigh the positives for Peloton right now. Plus, I don't believe I have the foresight to be able to accurately predict that things will turn around. Therefore, despite how attractively the stock is priced today, at a price-to-sales ratio of just 1, I think investors should avoid Peloton shares in 2023 until major signs of improvement are evident.
