Where Will Peloton Stock Be in 3 Years?

Peloton's (PTON 4.29%) stock closed at its record high of $167.42 on Jan. 13, 2021. That marked a 477% gain from its IPO price of $29 on Sept. 26, 2019. At the time, the bulls were dazzled by the exercise bike maker's explosive growth rates.

Peloton's revenue doubled in fiscal 2020 (which ended in June 2020) and surged 120% in fiscal 2021. Most of that growth was driven by the pandemic, which forced people to stay at home and caused brick-and-mortar gyms to shut down. But after the pandemic ended, its revenue dropped 11% in fiscal 2022 and declined another 22% in fiscal 2023. It remained deeply unprofitable, even though it gradually narrowed its net losses by executing thousands of layoffs.

Image source: Peloton.

Today, Peloton's stock trades at about $4 a share. Investors clearly weren't impressed by its desperate turnaround efforts, and rising interest rates exacerbated that pressure by driving investors away from speculative and unprofitable companies. But could this out-of-favor stock bounce back and surprise the bears over the next three years?

Peloton's biggest mistakes

Peloton sells exercise bikes and treadmills that connect their users to streaming video classes through integrated touchscreens. However, its products are pricier than similar products and require additional subscriptions to access the video classes.

That business model flourished during the pandemic, but it crumbled as gyms reopened and cheaper competitors entered the market. A disastrous recall for its treadmill in 2021 exacerbated that slowdown. The following year, its co-founder and CEO, John Foley, stepped down and was succeeded by Barry McCarthy, the former CFO of Netflix and Spotify.

Peloton's turnaround efforts

Under McCarthy, Peloton aggressively cut costs, laid off more employees, outsourced its production to a Taiwanese manufacturer, and started to sell its products on Amazon (NASDAQ: AMZN) to reduce its logistics costs and expand its reach beyond its first-party website and showrooms.

It also reduced its equipment prices while raising its subscription fees, and it partnered with Lululemon (NASDAQ: LULU) to sell the latter's athletic apparel and exclusively provide its digital fitness content. It hired a new chief marketing officer last December and recently launched a partnership with TikTok to reach younger consumers.

However, McCarthy's main turnaround strategy is to expand its higher-margin subscription business to curb its dependence on its lower-margin sales of bikes, treadmills, and other equipment. In its latest quarter, Peloton generated 57% of its revenue from its subscriptions and the remaining 43% from its fitness products. But over the past year, its declining equipment sales consistently offset the steadier growth of its subscription revenues.

Data source: Peloton. YOY = Year-over-year.

Peloton's sluggish subscription growth in the first half of fiscal 2024 suggested the company was saturating its niche market. It ended the second quarter with just 6.4 million members, representing a 4% drop from a year earlier, while its total number of paid app subscribers declined 6% to just 718,000. On the bright side, its equipment business experienced more moderate declines in the first half of fiscal 2024 in comparison with fiscal 2023, when the segment's revenue plummeted 45%.

For the full year, Peloton expects its revenue to decline 3% to about $2.7 billion as it struggles to scale up its business and retain its subscribers. But it also expects its streamlining efforts and the steady growth of its subscription business to boost its gross margin from 33% in fiscal 2023 to 44% in fiscal 2024. It expects to narrow its adjusted earnings loss before interest, taxes, depreciation, and amortization (EBITDA) from $208.5 million in fiscal 2023 to a midpoint of $50 million.

What will happen over the next three years?

For now, analysts expect Peloton's revenue to rise at a compound annual growth rate of just 2% from fiscal 2023 to fiscal 2026. They expect its adjusted EBITDA to finally turn positive in fiscal 2025 and to more than triple in fiscal 2026.

We should take those estimates with a grain of salt, but they indicate that its revenue and margin will gradually stabilize as it right-sizes its business. It ended its latest quarter with $738 million in unrestricted cash and cash equivalents -- as well as access to an untapped $400 million revolving credit facility -- so it probably won't go bankrupt within the next three years.

With an enterprise value of $2.8 billion, Peloton looks dirt cheap with a price equivalent to this year's sales. Therefore, any positive developments could drive its stock higher. I don't think Peloton will come anywhere close to revisiting its IPO price over the next three years, but it could bottom out at these levels and gradually creep higher as it stabilizes its business model, rebuilds its brand for a post-pandemic world, and expands its gross margin.