Peloton Interactive (PTON 4.29%) has definitely gotten its shareholders' portfolios seriously out of shape as the stock has fallen precipitously over the past couple of years. A flawed outlook by the previous management team -- namely, expecting the pandemic-fueled demand surge to continue in a post-social-distancing world -- has left the business fighting to survive financially.
Nonetheless, shareholders might be eyeing the company in hopes that the new leadership team's turnaround efforts will be successful. As 2023 approaches, should investors consider buying Peloton stock?
Ignore the valuation
With shares down by 65% year to date as of this writing, Peloton now sports a market capitalization of just $4 billion. And its price-to-sales ratio of 1.2 is far below the peak of about 20 it hit in December 2020. This incredible fall in valuation might appear attractive at first glance, but investors need to take a closer look at the worsening fundamentals of the business.
In its fiscal 2023 first quarter, which ended Sept. 30, Peloton's sales fell 23.4% year over year, marking the third consecutive period of declining revenue -- and all of those drops were greater than 20%. Its net loss totaled $408.5 million, though that was a marked improvement from its nearly $1.3 billion net loss in the previous quarter.
As of the end of the quarter, Peloton counted 2.97 million connected-fitness subscribers -- people who purchased a piece of its equipment and are paying the monthly membership fee -- a figure that increased by just 8,000 over the past three months. This is certainly not the type of growth that shareholders got used to seeing during the depths of the pandemic.
To make matters worse, customers aren't using Peloton's content and classes as much as they were before. In the latest quarter, the company stopped reporting average monthly workouts per connected-fitness subscriber after the metric had trended in the wrong direction in prior periods. Additionally, quarterly subscriber churn is now consistently above 1%. That's still a low figure, to be fair, but it's substantially higher than Peloton's historical churn rates.
Declining revenue, ongoing net losses, and falling engagement aren't the characteristics most investors prefer in the companies they add to their portfolios. Even though Peloton's valuation, as evidenced by its low price-to-sales multiple, looks appealing at first glance, it's hard to be optimistic about the business's prospects.
For the current quarter, management, led by CEO Barry McCarthy, is forecasting that revenue will decline by 37.2% (at the midpoint) year over year. This would be the fourth straight quarter of falling sales -- clearly not a good sign for an enterprise that's trying to turn things around.
However, something investors could get excited about is that the leadership team does think the company could reach cash-flow breakeven by the second half of the fiscal year. I'd temper my expectations, though, as the softening macroeconomic environment isn't helping Peloton's cause right now.
"We have seen some research that indicates that the economy is a headwind for us as it is for many other companies," CFO Liz Coddington said on the Q1 2023 earnings call. "And that is currently having an impact on near-term connected fitness hardware demand."
Stick to safer investments
Unsurprisingly, my recommendation right now is that investors avoid buying Peloton's stock. The company just faces too many issues, and the negative circumstances outweigh any positives. Furthermore, if a recession happens in 2023, as many experts predict, Peloton's business will continue to suffer. This is because it sells discretionary goods that will certainly fall even further out of favor with consumers when times are tough.
Investors should instead seek out businesses that are positioned to perform well in an economic downturn, such as consumer staples companies. But if -- and that's a very big if -- the CEO can turn things around and Peloton starts growing revenue rapidly again at some point in the future, investors might want to add the stock to their watch lists.
