It's hard to understate how dramatic Peloton Interactive's (PTON +1.49%) rise and fall over the past few years has been. By the end of 2020, the stock was up 489% from its price at its initial public offering. But as of this writing, shares are down 96% off of their all-time high. The business went from Wall Street darling to now being in the midst of a major strategic shift.
Assuming Peloton is able to successfully execute its ongoing turnaround strategy and get the business on a better path, where could the consumer discretionary stock be three years from now? Investors could be handsomely rewarded. Here's why that could be the case.
NASDAQ: PTON
Key Data Points
Attracting more subscribers
The name of the game for Peloton is to find ways to attract more connected-fitness subscribers, which are users who own a piece of equipment and pay the monthly membership fee for access to the workout content. As of March 31, the company had just over 3.1 million of these subscribers, good for a 5% year-over-year increase. This figure has steadily climbed over the years, even as Peloton's financials have struggled.
However, for the current quarter, management expects connected-fitness subscribers to post a sequential decline thanks to the uncertain macroeconomic environment. Because Peloton's products are discretionary in nature, consumers will certainly delay purchasing fitness equipment if times are tough.
But CEO Barry McCarthy mentioned how Amazon has been a solid distribution partnership thus far. Selling Peloton equipment at Dick's Sporting Goods locations can also work to boost subscriber numbers over time. And by emphasizing the certified pre-owned and rental programs, which can increase accessibility while also launching new products and entering new markets, Peloton can find ways to grow its user base.
Greater dependence on subscription revenue
In each of the three fiscal quarters of 2023, Peloton's subscription revenue has exceeded that of its hardware sales. And this appears to be McCarthy taking a page out of the playbooks of his former employers, Netflix and Spotify. The benefit is that subscriptions carry a superb gross margin of 68%, while hardware sales have produced a negative gross margin for several quarters now. The hope is that as more of Peloton's equipment finds its way into more households, even if the products are sold at a slight loss, the business can make up for this with its high-margin subscription fees.
Peloton's total gross margin in the latest quarter was 36.1%, up from 19.1% in the year-ago period, when subscriptions only represented a little over one-third of overall revenue. If this continues trending in the right direction, the company can once again become fully profitable while generating positive free cash flow. That's something shareholders have been desperately waiting for.
Pedaling to a higher stock price
More connected-fitness subscribers and better margins and profitability are certain to push up Peloton's stock price in three years, especially since at this point in time, there is so much uncertainty about what will happen to the business. Obviously, better fundamental performance from a company that has been struggling so much would quickly be a boon for the stock.
Right now, Peloton shares trade at a price-to-sales multiple of under 0.9. This is about as cheap as the stock has been in its entire history. This valuation demonstrates the heightened negative sentiment that has surrounded this company for the past couple of years. Moreover, it's a clear indicator that shareholders view the success of a turnaround situation as being completely up in the air. Having to go through another product recall, this time with the flagship Bike, is also pressuring Peloton's stock.
But if the company can hit the top two goals of growing its subscriber base and improving margins, shares should be higher in three years' time. Ultimately, it's up to investors to think about if they're willing to take on the risk.
