Peloton Interactive's (PTON 4.29%) stock closed at a record high of $167.42 on Jan. 13, 2021, representing a whopping 477% gain from its IPO price of $29 per share on Sept. 26, 2019. At the time, investors were impressed by the connected exercise bike maker's dazzling growth rates.
However, Peloton's stock subsequently plunged 95% and now trades at about $8 a share. Let's see why Peloton lost its balance, how it's trying to fix its business, and if it's a viable turnaround play for 2023.
Image source: Peloton.
When a growth stock stops growing
Back in fiscal 2020 (which ended in June 2020), Peloton's revenue doubled to $1.83 billion, its gross margin rose 4 percentage points to 46%, and its net loss narrowed from $196 million to $72 million. In fiscal 2021, its revenue soared 120% to $4.02 billion, but its gross margin dipped to 36% as its net loss widened to $189 million.
Peloton's accelerating top-line growth was driven by the pandemic, which forced more people to exercise at home as brick-and-mortar gyms closed down. Meanwhile, the stock's rally was fueled by the Reddit- and stimulus-induced buying frenzy in growth and meme stocks, which focused on raw revenue growth instead of sustainable valuations and actual profits.
But in fiscal 2022, Peloton's revenue fell 11% to $3.58 billion, its gross margin contracted to 19%, and its net loss widened to a staggering $2.82 billion. Its growth stalled out as the pandemic passed, gyms reopened, more competitors emerged, and it struggled with brand-tarnishing recalls and soaring supply chain costs. Last February, CEO John Foley resigned and the company laid off about a fifth of its global workforce.
For fiscal 2023, analysts expect Peloton's revenue to decline another 25% to $2.68 billion as its net loss narrows to $858 million. In its first-quarter shareholder letter from last November, Peloton's new CEO Barry McCarthy admitted that the company's turnaround "remains a work-in-progress."
Valuations and profits suddenly matter again
At its all-time high, Peloton had a market cap of $49.3 billion -- or 12 times the revenue it would generate in fiscal 2021. A company that consistently generates high-double-digit sales growth might deserve that high valuation, but Peloton isn't a member of that club anymore.
Today, Peloton is only worth $2.7 billion, or 1 times the revenue it's expected to generate in fiscal 2023. That bargain-bin valuation might limit its downside potential, but it could also continue to shrink if Peloton's revenue keeps declining.
Peloton's near-term outlook is grim. Inflation is curbing consumer demand for its pricey bikes and treadmills, which start at $1,445 and $3,495, respectively, and require monthly subscriptions. Rising interest rates will also make it tougher for Peloton to raise fresh cash while driving investors toward more profitable companies. In other words, all the tailwinds that made Peloton such a compelling growth stock in 2020 and 2021 have been replaced by brutal headwinds.
Can Peloton pull itself back from the brink?
Under McCarthy, Peloton has been cutting costs to drive its free cash flow (FCF) back toward "breakeven or better" levels. In addition to its layoffs, Peloton outsourced its production to the Taiwanese manufacturer Rexon Industrial and started selling its products on Amazon's marketplace to pivot away from its lower-margin direct-to-consumer model.
Those cost-cutting measures have slowed its bleeding. Peloton reported a negative FCF of $246 million in the first quarter of fiscal 2023, compared to a negative FCF of $652 million a year earlier. Its gross margin expanded 260 basis points year over year to 35.2%, while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin improved from negative 29% to negative 5.4%.
More importantly, Peloton is still locking in a small but dedicated base of subscribers. It ended the first quarter of fiscal 2023 with 2.97 million subscribers, which represented 18% growth from a year ago but stayed nearly flat from the previous quarter. Therefore, Peloton's business might still stabilize if it holds on to those subscribers, boosts its revenue per customer with fresh products or services, and continues to cut costs. It also recently started to rent out its bikes to gain new users.
That's certainly a tough balancing act to pull off, but Peloton also won't go bankrupt anytime soon. It held $938.5 million in unrestricted cash and equivalents at the end of the first quarter, and it still hasn't drawn a dollar from its $500 million revolving credit facility yet. However, its high debt-to-equity ratio of 12.9 (which includes its $3.3 billion in total liabilities) could make it difficult to secure additional financing at favorable rates if its liquidity eventually dries up.
It's not the right time to buy Peloton
Peloton isn't doomed yet, but it won't become a viable investment unless it right-sizes its business and grows its revenue and FCF again. Until that happens, inflation and rising interest rates will continue to cast dark clouds over its future -- so it still can't be considered a turnaround play as the bear market drags on.
