Peloton Is Down 92% From Its High. Time to Buy?

Peloton Interactive (PTON -5.76%), once one of the hottest stocks on Wall Street, is seeing some renewed optimism as the leadership team tries to turn things around. While the hypergrowth that shareholders saw during the depths of the coronavirus pandemic seems like ancient history today, Peloton is making progress at stabilizing its cost structure while trying to spur demand. And I think this is all that shareholders can ask for at this moment. 

Despite soaring 74% already in 2023 (as of this writing), shares of Peloton are still down 92% from their all-time high set in January 2021. Is it time for investors to buy the stock? Let's take a closer look. 

Turning things around 

In its latest reported period (the second quarter of fiscal 2023, ended Dec. 31), the fitness innovator posted revenue of $792.7 million and a net loss of $335.4 million. That top-line figure was better than Wall Street analysts had hoped, and it's largely why the stock surged more than 25% following the announcement. 

Peloton's net loss was worse than what analysts were expecting. However, it was smaller than the net loss of $408.5 million of the previous quarter.  

CEO Barry McCarthy, who had prior stops at Netflix and Spotify Technology, believes that the business is orchestrating its turnaround successfully. In the latest quarter, the company registered negative free cash flow (FCF) of $94.4 million, a drastic improvement from the FCF loss of $246.3 million in the previous three-month period. Getting to FCF breakeven has been McCarthy's overarching objective ever since he took over the lead job a year ago, and he said he hopes to achieve this goal in the back half of this fiscal year. 

Peloton now counts 3.03 million connected-fitness (CF) subscribers, or those who purchased a piece of equipment and pay the monthly membership fee for access to workout content. Management expects to add around 55,000 CF subscribers in the current quarter, which would translate to an increase year over year and sequentially. 

It's also worth mentioning that Peloton's subscription revenue ($411.3 million in the second quarter) has exceeded its hardware revenue ($381.4 million) for three straight quarters. McCarthy has been emphasizing the company's software offering and its valuable recurring revenue stream. This could be a harbinger of Peloton's operations going forward. And it can be a boon to profitability as subscriptions commanded a stellar gross margin of 67.6% in Q2. 

Invest at your own risk 

As of this writing, Peloton's stock trades at a price-to-sales multiple of 1.5, which is significantly lower than its historical average valuation. And it's still pretty close to the cheapest that the shares have ever been, enticing value-minded investors to take a swing at this stock.  

I can understand both sides of the argument with this business. With Peloton's latest quarterly numbers, which were clearly viewed as extremely positive by the market, the bullish case could be restored. Even though the company is still losing money on the sale of its hardware products, this segment's gross margin is stabilizing somewhat. Moreover, operating expenses continue to decline on an absolute basis. 

There's little doubt that the company offers a unique and compelling product, and this definitely has value. If things can trend in the right direction, the company can attain revenue and subscriber growth, and positive FCF becomes a usual occurrence, then buying Peloton today at its cheap current valuation might prove to be a fantastic financial decision. 

However, the bears can still highlight how putting money in turnaround situations is a difficult thing to do, and it's more like speculation than true investing. That's because there is too much uncertainty to make any high-probability guesses as to what will happen next. Where will Peloton be one year from now? I don't think anyone really knows. 

What really stood out to me was fact that all of the initiatives McCarthy put in place, like a pre-owned program, bike rentals, and partnerships with Amazon, Dick's Sporting Goods, and Hilton Hotels, only accounted for 19% of connected-fitness product orders in the quarter. To be fair, it is early. But I'd expect this proportion to be much higher. 

Readers will need to decide for themselves which side of the fence they are on.