After its initial public offering in September 2019, Peloton Interactive (PTON +1.39%) skyrocketed in value right out of the gate. From that IPO date to its all-time high in January 2021, the stock was up an incredible 550%, as Wall Street fell in love with the fitness disruptor and its outstanding growth trajectory. But it's been a downward spiral since then, as shares are down a whopping 92% over the past two years.
Even though Peloton's stock trades at a ridiculously cheap price-to-sales multiple of 1.2 today, investors should avoid owning the business right now, no matter how tempting the low valuation might be. Here's why this is the smart investing approach in 2023.
NASDAQ: PTON
Key Data Points
The excitement has faded
Readers are probably all too familiar with Peloton's rapid rise in popularity. The company was certainly boosted by pandemic-fueled demand, but it was growing like gangbusters even before the health crisis. Revenue was increasing at triple-digit year-over-year rates, Peloton couldn't keep up with the huge demand for its products, and the membership base was soaring.
Cracks started forming in calendar 2021, when Peloton was delaying equipment deliveries for customers with no explanation. It also had to recall its Tread and Tread+ (the latter is still not available for sale), and it was reported that the company had accounting irregularities with how it was valuing inventory. Add these problems to lapping tough yearly comparisons, gyms reopening, and a normalizing of consumer behavior, and it makes sense that Peloton started pedaling backwards.
The business is still feeling the pain. In the most recent fiscal quarter (Q1 2023 ended Sept. 30), Peloton posted a year-over-year revenue decline of 23.4%, with management expecting a 37% drop in the just-ended quarter. Net losses have improved on a quarter-over-quarter sequential basis, but they are still sizable. And it looks like the membership base is plateauing, as it dropped by 200,000 in the latest quarter.
The leadership team is doing everything it can to turn things around and improve the situation. They're finding ways to lower the company's cost structure by switching to third-party manufacturers and delivery providers, reducing employee headcount, and cutting marketing spend. Additionally, management is trying to drive higher demand with new distribution partnerships with Amazon and Dick's Sporting Goods. Getting Peloton's margins in order, while returning to growth, are the overarching goals with these strategic moves.
I respect what CEO Barry McCarthy is trying to do. It's a tough challenge to get the business on a solid footing again, a task made even harder by how quickly things can change on a weekly or monthly basis. But the current macroeconomic environment isn't helping, either. If the U.S. economy enters a recession sometime in 2023, the worst is likely still to come for this company.
Focus on safer stocks
Investing in Peloton in hopes of management achieving a successful turnaround is more like speculating than true investing. There are just too many uncertainties with the Peloton story right now, with limited visibility of not just where the business will be in the next three to five years, but what will happen in the next few quarters. As a result, it's almost impossible to predict what will unfold for this inconsistent company.
Luckily, there are no bonus points for added complexity when it comes to investing in the stock market. Instead of gambling on this highly uncertain situation, investors would be better off looking exclusively at companies that have proven business models with long, successful operating histories of increasing sales and generating positive free cash flow. Moreover, owning shares in companies with strong balance sheets, in addition to the above favorable characteristics, will definitely help if the economic situation worsens. And it'll give you peace of mind, which is invaluable when it comes to your hard-earned capital.
Despite what appears to be a very attractive valuation, investors should wait for major financial improvements before considering buying Peloton stock right now. In the meantime, it might make sense to seek out safe, predictable, and profitable enterprises to add to your portfolio in 2023.
