After rapidly approaching a $50 billion market cap roughly two years ago, Peloton Interactive (PTON 3.01%) is facing a new reality today. Its shares plunged by an eye-watering 78% in 2022, and investors are wondering what the future holds.
Although the business now carries a market cap of just $3.7 billion, Peloton stock has remained on the radar of many investors. Let's dissect the bull and bear cases for the once-booming connected fitness brand.
The biggest bull argument
It's probably not a huge surprise that a critical feature of the bull case for Peloton centers on the idea that demand for its expensive equipment will bounce back and return to growth. Its sales climbed 99.6% in fiscal 2020 (which ended June 30, 2020), and then another 120.3% in fiscal 2021 as consumers sought out ways to work out at home during the early stages of the pandemic. While its sales have undoubtedly declined in more recent quarters, management is trying whatever it can to drive higher interest in its offerings.
For example, under new CEO Barry McCarthy, Peloton launched a rental program last year that allows customers to pay a single monthly fee for the Bike or Bike+ (and the fitness content), with the option to purchase the equipment outright after a 12-month period at a reduced price. The strategic rationale behind this is to try and reduce friction for customers and make it easier for them to try the company's expensive equipment. The hope is that these users will become hooked to the Peloton experience.
Other initiatives Peloton is undertaking include selling products on Amazon and at Dick's Sporting Goods locations. It's all about finding new distribution channels to push more units. What's more, Hilton Hotels is putting Peloton Bikes in the fitness centers of all 5,400 of its hotels, where they will be free to use for guests.
To be clear, Peloton has built up a brand that is synonymous with connected fitness. According to Comparably, the brand has an excellent net promoter score of 57, which is higher than the score of consumer favorite Apple. Credit goes to the company's founding team for disrupting an industry that was ripe for an upgrade. They found a way to incorporate data and software to create a fun, exciting, interactive, and convenient fitness experience. This certainly still has value.
Maybe Peloton wasn't just a pandemic play, and it's here to stay for the long term.
The biggest bear argument
On the other hand, the most prominent bear arguments for Peloton are centered on the premise that its glory days are in the past. As I alluded to earlier, in each of the past three fiscal quarters, Peloton has registered year-over-year revenue declines north of 20%. The company's connected-fitness subscriber count appears to have plateaued at just under three million, increasing by only 7,000 in the most recent fiscal quarter. And monthly churn was 1.1%, far greater than what it was during the depths of the pandemic two years ago.
These negative trends might be an indication that Peloton's best days are behind it. Gyms have reopened, and Planet Fitness, a low-cost fitness chain with 2,410 locations and 17 million members, is posting strong growth. It's hard to beat paying $10 a month for access to a gym.
With falling demand, Peloton's financials will continue to struggle. The business posted negative free cash flow of $246 million in the fiscal 2023 first quarter, after posting negative free cash flow of $2.4 billion in fiscal 2022. Plus, the company has $1.7 billion in long-term debt on its balance sheet, prompting bears to argue that Peloton might not have much time remaining before it becomes insolvent or is acquired. Management says it's aiming to achieve positive free cash flow toward the end of the current fiscal year, a goal it has repeatedly kicked down the road.
Consequently, Peloton might join the long list of fitness brands that had their 15 minutes of fame and then faded out. Remember the Bowflex Home Gym or the ThighMaster? Attracting consumer interest with an exciting product worked for a short period of time, but it might not be enough to propel a company to lasting success when users struggle to stick to their workout plans and competing offerings flood the market.
In my opinion, the bear case outweighs the bull case, so I don't think Peloton's shares make for a good investment right now. Unless things quickly take a turn for the better, I'd suggest investors pass on this consumer discretionary stock, despite how cheap it looks.
