Peloton Interactive (PTON 4.29%) is a popular brand in the fitness industry that achieved cult status at the height of the pandemic thanks to its digitally enabled at-home exercise equipment. When gyms were closed and we lived under social restrictions, Peloton was a saving grace for fitness enthusiasts.
But times have changed. Demand for Peloton's products stalled when pandemic restrictions lifted, which led the company's revenue to shrink. It prompted drastic cost cuts across the entire business under the leadership of a new CEO, Barry McCarthy, who joined in February 2022 to steady the ship.
While McCarthy has been successful in many respects, Peloton stock remains 97% below its all-time high and continues to sink. By one important metric, it's now trading at the cheapest valuation since the company went public in 2020. But here's why investors shouldn't rush to buy it.
Peloton is trying to pivot back toward growth
Over the last two years, Peloton slashed its workforce by half, outsourced its manufacturing, and adjusted its marketing strategy in an effort to cut costs. But the company is now turning its attention to growth initiatives once again.
In the recent fiscal 2024 first quarter (ended Sept. 30), the company highlighted a series of deals with leaders in the sports industry to help promote its exercise equipment. It partnered with the English Premier League team Liverpool, which will give Peloton access to the soccer team's 150 million global digital followers. It could also bolster the company's presence in international markets, where its growth has been the strongest recently.
And it inked deals with fitness apparel company Lululemon, the University of Michigan, the National Basketball Association (NBA), and the WNBA. And the company says this is just the beginning, because it has been approached by more than 50 top pro sports teams and universities looking to collaborate.
University deals could go beyond promotional activity, because Peloton says it will have an opportunity to sell its products not only to players, but also to students and staff members.
Beyond those initiatives, Peloton said it continues to see strength in its new rentals program, which allows consumers to lease an item of equipment on a subscription basis. The company had 54,000 renters at the end of the first quarter, and it expects to grow its revenue in this segment by 90% year over year by the end of fiscal 2024.
Image source: Peloton Interactive.
Peloton has a steep mountain to climb
Peloton's new growth initiatives, like its rental program, are still really small, so they are not offsetting the broader slowdown in product sales. The economy is relatively weak right now with interest rates soaring over the last 12 months, so buying expensive exercise equipment isn't high on consumers' list of priorities. The company's flagship Bike+, for example, sells for $2,495.
As a result, revenue shrank by 3% in the first quarter compared to the same period last year. Equipment sales were the big drag, with revenue falling by 11%.
Subscription revenue, on the other hand, actually grew by 0.6%. Peloton has expanded its addressable market by offering a mobile application, even if someone doesn't own one of the company's products. It gives those paying subscribers a workout plan and even allows them to connect the app to non-Peloton exercise equipment to track their progress.
Unfortunately, management continues to run out of room to turn its fortunes around, because it generated a net loss of $159 million during the first quarter. That turned into positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $9 million after stripping out interest costs and noncash expenses like stock-based compensation, but cash on hand still shrank by $65 million compared to just three months prior.
The company now has just $748 million in cash on its balance sheet, which means it has to focus on survival by achieving profitability before it can return to its roots as an innovative force in the fitness industry. Without revenue growth, however, it's going to be almost impossible to achieve that.
Peloton stock is the cheapest it has ever been
As I touched on earlier, the stock plunged 97% from its all-time high, and the company's revenue is also falling. However, its stock price has declined at a much faster rate than its revenue, which means its price-to-sales (P/S) ratio -- which is an important valuation metric -- is now at the lowest level since Peloton was listed publicly in 2020.
Image source: YCharts.
It signals that investors have very little confidence in Peloton's ability to turn things around. If investors thought a genuine return to annual revenue growth was around the corner, it's unlikely they would be pricing the stock at rock bottom.
In fact, according to Peloton's own forecast, fiscal 2024 revenue is likely to be down compared to fiscal 2023. To make matters worse, it expects to continue generating losses even on an adjusted EBITDA basis.
Peloton should be a "show me" story for investors, who should wait for the company to prove it can deliver growth and a stable financial position before buying the stock.
