What happened
Peloton (PTON 4.29%) stock rose 26.3% last month, according to S&P Global Market Intelligence. There was no major news that shifted expectations for the company's short-term revenue or earnings, but investors became generally more bullish about Peloton's evolving long-term strategy. This created momentum for the stock and pushed it higher through a more aggressive valuation as macroeconomic data became more favorable in July.
So what
Peloton's price-to-sales (P/S) ratio surged to nearly 20 during the COVID-19 pandemic, which is unsustainably high for the vast majority of stocks. Unsurprisingly, Peloton shares crashed in 2021 as investors became more rational about the company's financial prospects. People weren't going to be stuck working out at home permanently; there are plenty of fitness goals that can't be accomplished on a bike or treadmill; not everyone is willing to spend thousands of dollars on home exercise equipment; and there are a variety of alternatives that function as formidable direct and indirect competitors for Peloton.
None of these factors are catastrophic for the company, but they do place a cap on its revenue potential and pricing power. The correction to share prices was rapid; its P/S ratio tumbled below 0.8, suggesting that the wild price swings were driven by investor sentiment rather than operational performance.
PTON PS Ratio data by YCharts.
Peloton "reintroduced" itself to consumers in May and made some key changes to its product offerings. The company is trying to change its reputation as an expensive home exercise equipment brand. Instead, Peloton wants to be recognized as an "anyone, anywhere" fitness leader, with several app tiers allowing users to enjoy a huge catalog of classes for all sorts of health goals. This is a shift toward a content-first offering that's not limited to any specific sort of exercise or routine.
Image source: Getty Images.
That pivot was celebrated by investors for addressing some of Peloton's biggest growth headwinds. This renewed optimism helped the stock participate in marketwide momentum driven by macroeconomic data in July. The prospect of more accomodative interest rates and stable economic growth tends to be hugely beneficial for riskier stocks undertaking turnaround stories, like Peloton.
Now what
Even after its recent gains, Peloton's valuation ratios are still near the low end of their recent historical range. The stock is still down roughly 95% from its 2021 high, and its P/S ratio is 1.0. That's fairly low in today's market, but Pelton is burning cash while sales shrink, so there's a reason for the discounted valuation.
Buying Pelton today would be a somewhat risky bet on the company's turnaround vision. The most recent quarterly results show year-over-year declines in revenue and subscriber volume, but these metrics were flat relative to the previous quarter. Meanwhile, the company has reduced its cash burn rate by slashing expenses. These metrics could be early signs of a turnaround in process, and the stock has room to rise if Peloton's strategic pivot works.
