After skyrocketing 550% from its initial public offering price in September 2019 to its all-time high in January 2021, Peloton's (PTON 4.29%) stock has come crashing down. As of this writing, shares are down 93% from their peak. And as a result, some risk-seeking investors might view this as a good time to get aggressive and buy the stock at a huge discount.
Without a doubt, Peloton is going through a huge restructuring plan, changes that are being orchestrated by CEO Barry McCarthy. While it's always scary investing in these types of situations, if Peloton can become even a tiny bit of the thriving enterprise that it was during the depths of the pandemic, shares could rise substantially in the not-too-distant future. But to be clear, that's a big "if."
With that being said, is it finally time to buy Peloton stock? Let's take a closer look at the facts.
Peloton's losses are shrinking
In the most recent fiscal quarter, Q2 2023 ended Dec. 31, Peloton posted a net loss of $335.4 million. Usually, a net loss is bad news, but this figure was lower than the losses from the prior quarter and the year-ago period. Even more noteworthy, the company's free cash flow (FCF) loss of $94.4 million was significantly less than the $546.7 million FCF loss in Q2 2022. These are signs of improvement.
In his first year at the helm, McCarthy instituted a number of measures to streamline Peloton's operations. The company's headcount was cut by more than 50%. By outsourcing manufacturing and delivery functions, Peloton is hoping to reduce its costs. And the business cut annualized run-rate expenses by $830 million. What's more, Peloton continues to work through its pile-up of inventory, freeing up tied up capital.
The result is a company that has its cost and expense structure more aligned with the demand it is currently seeing. This is in stark contrast to a few years ago, when a pandemic-fueled demand surge forced the previous management to overinvest. For example, Peloton announced the development of a $400 million manufacturing facility in May 2021 that it is now looking to sell. Correcting previous mistakes has been the main focus in the past year.
Peloton is posting revenue declines
Despite notable efforts to try to fix the company's cost structure, Peloton is struggling when it comes to boosting demand for its products. To be fair, eliminating unnecessary expenses and processes to run a more efficient operation has been a mission-critical task for Peloton, but there is only so much McCarthy and his team can do when it comes to cutting costs. Eventually, shareholder attention will turn to how the business can return to growth and drive higher sales.
And Peloton has struggled in this regard. In the latest quarter, overall revenue declined 30%. And this was the fourth straight three-month period that sales dropped on a year-over-year basis by double digits. It might be OK for shareholders to see Peloton struggling with higher costs if revenue was still rising at a fast clip, but that hasn't been the case at all. While sales were increasing in the triple-digit percentages during the pandemic, it's evident that now the Peloton brand isn't garnering as much excitement from consumers these days.
To its credit, Peloton was able to increase its connected-fitness subscriber base 10% in the most recent quarter, bringing the total to 3.033 million. But the company is still selling its hardware at a loss, as connected-fitness products revenue sported a negative gross margin of 11.2% in the latest quarter. Until Peloton can start to sell its equipment at a positive gross profit, I'm not convinced the demand from consumers is as strong as management portrays it to be.
Investors need to thoughtfully weigh both sides of the investing argument for Peloton before making a decision about the stock. For some, the current progress might be enough to entice them to buy the stock, while for others, there needs to be concrete evidence that overall revenue is back on the rise again.
