Perhaps nothing is as startling as Peloton Interactive's (PTON 4.29%) monumental rise than its dramatic plunge. The fitness innovator has seriously fallen out of favor following a ridiculous demand surge during the worst of the coronavirus pandemic. As of this writing, shares are trading 96% below their all-time high from about two and a half years ago, reflecting investors' deep pessimism.
More recently, Peloton's latest financial results for its fiscal 2023 third quarter (ended March 31) were a mixed bag. Losses were worse than analysts expected, but revenue was better than anticipated. The business is still seemingly a long way from sustainable profitability as it continues executing its turnaround strategy.
To be clear, buying Peloton's stock today looks like a high-risk, high-reward move because there is a lot of uncertainty. But if there is a bull market on the horizon, investors will wish they owned shares. Here are three reasons why.
1. Optimizing the cost structure
Like most companies, Peloton has been doing whatever it can to optimize its costs for what has been a dicey economic period. The business shrunk its head count. And most importantly, the leadership team has decided to transition the structure from more fixed costs to more variable costs. This means manufacturing and distribution capabilities, which used to be handled primarily in-house, are now being outsourced. This results in Peloton better matching its financials to suppressed demand for its expensive exercise equipment.
It appears to be working. In the most recent fiscal quarter, the company posted a net loss of $276 million. This was less than the red ink reported in the last three months of 2022, and almost a third of the $757 million loss from the year-ago period.
While one has to wonder why Peloton didn't better position its financial situation when times were good, now that it's being forced to cut costs, it's at least an encouraging sign that the bottom line is heading in the right direction. Management expects the business to achieve breakeven with free cash flow soon.
2. Waiting for a rebrand
The leadership team noticed that many workouts on Peloton are non-cycling related and occur without the use of the company's hardware products. So, it spurred some thinking around how better to position marketing to attract a wider audience. Management has emphasized Peloton's upcoming rebranding, which is scheduled for some time in May. "We are relaunching the brand to better communicate our value proposition," CFO Liz Coddington said on the fiscal Q3 2023 earnings call.
Peloton also plans to reintroduce its digital app, which has about 850,000 subscribers, with a tiered membership structure. Executives believe these upcoming initiatives are huge potential growth drivers. Anything that can fuel demand for a company that has become unpopular is wonderful news.
I think these moves also reinforce the goal of trying to transition Peloton away from a reliance on hardware sales toward high-margin subscriptions. In fact, subscriptions carried a stellar gross margin of 68% last quarter versus hardware's 5%. If going forward, more revenue comes from subscriptions, Peloton could be a much more viable enterprise that can produce profits and cash with ease.
3. Lots of pessimism
Peloton's stock has fallen 50% over the past 12 months, and as I mentioned above, it's still down a jaw-dropping 96% from its peak. This tells me the pessimism surrounding the business still remains at extremely high levels. The flip side to this is that expectations are very low, and the opportunity to surprise to the upside could be a boon for the stock price.
For the current quarter, management forecast a 6% drop in revenue and a 1% sequential decline in connected fitness subscribers. These are muted expectations given the state of the economy right now.
But because Peloton's turnaround has been a situation full of heightened uncertainty, even what seems like minor progress, like a small beat as it relates to earnings per share or even adding more subscribers than anticipated, could propel the stock higher in short order. What's more, any more positive detailed updates CEO Barry McCarthy provides about the progress Peloton is making to right the ship will also likely be viewed bullishly by shareholders. And that's another reason it might be a good idea to own the stock amid a potential bull market.
