Peloton Interactive (PTON +6.45%) was once one of the most beloved businesses on Wall Street. Before the pandemic and during its early days , the company experienced skyrocketing growth, and the shares soared over 400% in the 12 months before they hit their all-time high in Jan. 2021.
But it's been a disappointing story since then. Falling demand and financial troubles led investors to sour on the stock, which currently sits 97% below its peak.
Will 2024 be the year that Peloton shares soar?
Fundamental improvements
Peloton's current CEO, Barry McCarthy, joined the company two years ago to help turn around this struggling business. A key focus area has been to rightsize the expense structure, which was bloated thanks to the previous leadership's belief that surging demand during the early pandemic would last permanently. Another goal was to drive greater high-margin recurring revenue.
It looks like there's some progress being made. In the fiscal 2024 first quarter (ended Sept. 30), Peloton posted a net loss of $159.3 million. That's obviously not a profit, but it's a much smaller loss than what the business reported in the year-ago period.
And of Peloton's $595.5 million in total revenue in the quarter, 70% came from subscriptions. This is a huge reversal from three years ago when the company's expensive hardware products drove the top line.
NASDAQ: PTON
Key Data Points
In 2024, it's critical that Peloton continues making notable progress on this front as investors want to see solid growth trends. Peloton's membership base shrank by 1% on a sequential basis in fiscal Q1, and revenue is still declining. The reintroduction of the Tread+, which was recalled due to safety issues, could help.
To jumpstart things, management has entered into various partnerships to aid in brand awareness and distribution. Time will tell if these can move the needle.
The hope is also that Peloton can turn the financial corner sooner rather than later, and that means profits. The company did generate positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $9.1 million last quarter, but I'm waiting for Peloton to consistently generate positive net income.
External factors
Peloton can do everything in its power to have a good year in 2024, but there are some variables that are just outside of its control. And this is what all businesses must deal with.
The first is the state of the economy. If a recession does end up happening this year, it would almost certainly hurt Peloton's turnaround efforts. The company sells premium fitness equipment and content, and consumers tend to cut back on this kind of discretionary spending when times get tough.
I'd also point to any changes in the stock's valuation. Shares currently trade at a price-to-sales (P/S) multiple of just 0.7. That's a cheap valuation that represents the pessimism still surrounding Peloton. Expectations are definitely low, but this also leaves room for substantial upside should sentiment improve.
No matter how much people try, no one can say exactly what the economy or market will do over the course of this year. And that doesn't necessarily make or break the investment thesis. At the end of the day, Peloton remains a high-risk stock whose business is trying to successfully find its footing. For me, that's enough of a reason to avoid buying shares.
