Things just seem to be getting worse for Peloton Interactive (PTON 4.29%). The connected fitness company's sales have plummeted, and there's been limited progress under new leadership.
Peloton stock fell after its latest earnings report, but there are still signs of life. Is there any reason to be hopeful here? Actually, yes.
Grasping at straws?
Peloton fielded outsized demand for its connected fitness equipment in the early stages of the pandemic when people, even fitness enthusiasts, were stuck at home. It made a critical error in overestimating future demand and investing in new warehouses and inventory. Then, as sales slipped, Peloton dug itself deeper with acquisitions and failed partnerships.
The company made a pivotal decision to oust its founder-CEO and hire an executive with long experience in subscription businesses. Barry McCarthy is succeeding in stemming the company's cash bleed, and he's been leading Peloton through its next phase as it experiments with various initiatives to generate higher growth.
So far, though, it's been an exercise in attempts, with some more successful than others.
Peloton had piloted a co-branded school project with the University of Michigan that didn't succeed as planned, and the company is dropping it. Peloton has also been having trouble with its member support team, which is a fiasco for an elite service. Management is going to revamp the customer service system to meet customer requirements.
McCarthy's take on this was, "If we're not failing, we're not being aggressive enough testing new initiatives." That's a positive attitude.
Where the growth is
So, here's what is working. Last year, Peloton, which had previously been exclusively direct to consumer, began to sell its equipment through Amazon and Dick's Sporting Goods. Unit sales from these channels increased 74% year over year in the 2024 fiscal second quarter (ended Dec. 31, 2023).
The second high-growth initiative is bike rentals, and management is guiding for a 100% year-over-year increase in sales from this channel for the fiscal year. Bike rentals have a "buyout rate," which was 11% in the second quarter, aiding in its outperforming expectations, and there was lower churn for this segment.
Peloton inked a deal with Lululemon Athletica last year to become the athletic wear company's exclusive provider of content for its Studio program, and it's been performing better than expected. Peloton also recently created a partnership with TikTok for a channel to introduce viewers to Peloton's brand and create more of a buzz. Its first live class had 130,000 views, and viewership increased by 3 times in the first three weeks of the deal.
Finally, McCarthy understands that the company has to innovate to grow, and Peloton has an upcoming treadmill launch that's yielding higher-than-expected interest. That, in turn, is creating higher demand for the standard treadmill, and management says that the treadmill market is double that of the bike market.
This could become a strong product, but it's likely to take time as the company continues to develop and figure out a clearer direction forward.
Is this a buy opportunity for Peloton stock?
Peloton stock is down about 74% over the past year and an astonishing 97% from its highs. At the current price, Peloton stock trades at only 0.5 times trailing-12-month sales.
Right now, that doesn't look like a bargain. It's a well-deserved low multiple because there's plenty of risk and not enough progress. Sales continue to drop, decreasing 6% year over year in the second quarter, although gross margin has improved, and the company is on its way toward positive free cash flow.
There have been rumors that Apple or another tech company could buy Peloton, which might benefit Peloton shareholders. There have been some recent wins, and I wouldn't count out the potential for a turnaround. But as it stands right now, it's not a risk that's worthwhile for most investors.
