Peloton Interactive (PTON 4.29%) makes exercise equipment designed for the home, and operates a digital application filled with relevant content including virtual fitness classes. But for the last two years, the company has been in a fight for its own survival.
Naturally, Peloton was a hit during the pandemic in 2020 and 2021 because many consumers stayed at home due to lockdowns and social restrictions. But the company's growth fell off a cliff last year and plunged its bottom line deep into loss territory, forcing it to make a series of drastic changes just to stay afloat.
The latest change came last month with the introduction of Peloton Gym, which was designed to broaden Peloton's addressable market and take its exercise programs out of the home and into the wider world. It's a step in the right direction, but is it enough to make investors want to buy the stock right now?
Image source: Getty Images.
Peloton pedals toward its mobile application
Peloton's flagship product has always been its stationary at-home exercise bike. It's fitted with a digital screen which serves as a portal to the company's fitness classes and virtual instructors. Customers can also opt for the Bike+ version, which features a swiveling screen, enabling the user to watch non-cycling classes while not sitting on the equipment.
That's precisely the market Peloton is leaning into now. In the fiscal 2023 third quarter (ended March 31), the company said 57% of all workouts accessed on its app were not cycling-related, and 62% of active members participated in non-cycling activities like strength training, yoga, and meditation. In fact, about 38% of Peloton members were completing workouts that involved no hardware at all.
The company says there's a significant gap between those numbers and the way it's been marketing its products -- in other words, Peloton's messaging hasn't evolved to suit the way consumers are actually using its platforms.
Peloton currently has 3.1 million connected fitness subscribers; these members own a Peloton hardware product like the Bike or a rowing machine. But the company also has 853,000 subscribers to its mobile application, which doesn't require ownership of any equipment. In an announcement in May, Peloton introduced three new subscription tiers specifically aimed at those customers.
There is one free tier, and two paid tiers called Peloton App One and Peloton App+. The latter is priced at $24 per month and includes the company's entire suite of digital offerings with unlimited access to live and exclusive classes. It also features a cadence tracker allowing the user to sync the app with a non-Peloton bike via Bluetooth to track progress.
All three of the new tiers provide access to Peloton Gym, which offers step-by-step workout plans, and unique activities which count toward streaks, challenges, and achievements to give members a greater sense of accomplishment.
Peloton's progress might slow in the short term
In fiscal 2022 (ended June 30, 2022), Peloton's revenue plummeted and the company suffered a whopping $2.8 billion net loss which put the company on the path to bankruptcy if it didn't make immediate changes -- it simply didn't have enough cash on hand to survive another year like that.
A new CEO had been installed a few months prior, and he delivered exactly what the company needed. Peloton's workforce has since been slashed by more than half, its hardware manufacturing was moved offshore, and it began to sell its equipment via third-party retailers like Amazon for the first time.
Some green shoots appeared from those changes in the company's fiscal 2023 third quarter. Revenue of $748 million -- while down year over year -- was much better than forecast. Peloton also reported negative adjusted free cash flow (FCF) of just $55 million. And most importantly, it's arrested the bleeding in its cash balance, now at nearly $874 million. That amount should be more than enough to get the company to a breakeven point if its progress continues on the current trajectory.
Unfortunately, Peloton expects its revenue to shrink to $650 million in the upcoming fiscal 2023 Q4, as broader economic challenges take a toll on consumer spending. But there is some good news: The company expects its losses to narrow further as the cost cuts continue to take effect.
Peloton stock offers an attractive risk-reward proposition
Peloton stock has crashed 95% from its all-time high, at the height of the pandemic. And since it continues to trade near its 52-week low, investors are clearly concerned about the company's prospects for the future.
But as of this writing, the company is valued at $2.6 billion -- yet Wall Street analysts believe it will generate $2.8 billion in revenue this fiscal year, placing the stock at a price to sales (P/S) ratio of just 0.9. That's near the cheapest level since Peloton went public, and it's far below its peak P/S of 15.3. Again, this reflects sheer pessimism among investors.
But Peloton is close to taking its worst-case scenario off the table, and looks as though it will survive. Plus, there's even a chance it could become profitable, especially if it continues to focus on acquiring customers for its mobile app. Software subscriptions tend to carry a very high gross profit margin (sometimes as high as 80%), and Peloton is already seeing its overall margin climb as a result: It was 36% in Q3 fiscal 2023, and is expected to jump to 41% in the current quarter.
The company has achieved all of that during a miserable economic period, and it will likely catch a tailwind when conditions improve in the near future. Therefore, given its present valuation, Peloton stock presents an enticing risk-reward opportunity for investors who are willing to hold for the long term to see this turnaround through.
