Peloton Interactive's (PTON 4.84%) stock soared nearly 27% on Feb. 1 after the company posted its latest earnings report.
For the second quarter of fiscal 2023, which ended on Dec. 31, the connected fitness device maker's revenue fell 30% year over year to $793 million but still beat analysts' expectations by $80 million. Its net loss narrowed from $439 million to $335 million, or $0.98 per share, which missed the consensus forecast by $0.31. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss also narrowed from $267 million to $122 million.
Peloton's business is still shrinking, but its narrower losses and outlook offered a few glimmers of hope. For the third quarter it expects its revenue to decline 26%-28% year over year, compared to analysts' expectations for a 28% drop, and for its adjusted EBITDA loss to narrow from $194 million to $35-$50 million.
Image source: Peloton Interactive.
That progress drove away some of the bears, but Peloton's stock remains more than 40% below its IPO price after its post-earnings pop. Will it continue to recover and outperform the market over the next 12 months?
What happened to Peloton?
When Peloton went public in Sept. 2019, the bears balked at its idea of selling expensive exercise bikes tethered to subscription-based video workouts. That's why its stock initially dipped below its IPO price of $29 on its first trading day.
But a few months later the COVID-19 pandemic struck and forced brick-and-mortar gyms to close down. As a result, Peloton's sales doubled in fiscal 2020 (which ended in June 2020) and rose 120% in fiscal 2021.
But in fiscal 2022, Peloton's revenue fell 11% to $3.58 billion as the lockdowns ended, brick-and-mortar gyms reopened, and more competitors entered the market. A brand-tarnishing recall for its connected treadmill exacerbated that slowdown. Last February, CEO John Foley stepped down and the company laid off about a fifth of its global workforce.
But those cost-cutting measures came a bit too late. Peloton's net loss already more than doubled from $72 million in fiscal 2020 to $189 million in fiscal 2021, then widened to a staggering $2.82 billion in fiscal 2022.
What's Peloton's turnaround strategy?
Peloton's new CEO, Barry McCarthy, is trying to stop that bleeding by outsourcing its production overseas, selling its products on Amazon's third-party marketplace instead of its own capital-intensive direct-to-consumer platform, and reining in its other expenses.
Peloton's revenue fell 27% year over year to $1.41 billion in the first half of fiscal 2023. But its net loss narrowed from $815 million to $744 million, while its adjusted EBITDA loss narrowed from $500 million to $155 million.
As a result, its free cash flow (FCF) improved from negative $1.2 billion in the first half of fiscal 2022 to negative $341 million in the second half of 2023, and it expects its FCF to reach breakeven levels by the end of this year. Those improvements have slowed down the rate at which Peloton is burning through its cash and equivalents, which declined 46% year over year (but only 7% sequentially) to $871 million at the end of the second quarter.
As Peloton narrows its losses, it's focusing on stabilizing its subscriber base, boosting its subscription revenue to reduce its overall dependence on hardware, and keeping its churn rate low. Those efforts seem to be working. In the second quarter its number of subscribers rose 10% year over year to 3.03 million, while its subscription revenue grew 22% and accounted for over half its top line. Its churn rate rose 40 basis points year over year (but stayed flat sequentially) at 1.1%.
If Peloton can maintain those stable growth rates, its numbers could improve significantly in fiscal 2024. For now, analysts expect its revenue to dip 23% in fiscal 2023, but to rise 6% to $2.92 billion in fiscal 2024 as its business stabilizes. They also expect its adjusted EBITDA to turn positive again in fiscal 2024.
We should take those forecasts with a grain of salt, but Peloton's numbers are improving. If it can pull off its ambitious turnaround over the next few quarters, then its stock might just be a screaming bargain at two times next year's sales.
Where will Peloton's stock be in a year?
Peloton isn't out of the woods yet. It still needs to cut costs, retain its subscribers, and fend off challengers like Echelon, Lululemon's Mirror, and Apple's Fitness+. However, I believe its downside potential should be limited this year as long as it continues to stabilize its sales and narrow its losses. I'm not certain if Peloton will outperform the market by the end of 2023, but its shares could gradually rise higher as its turnaround plan bears fruit.
