While investors benefit from a raging bull market, it's interesting to see companies that continue to underperform. Peloton (PTON 4.29%), for example, is currently 97% below its all-time high. And shares have dropped 66% in the last 12 months (as of Feb. 14).

This consumer discretionary stock was once a darling on Wall Street. But it has been pedaling backward for the past few years.

As of this writing, the beaten-down shares are trading at a price-to-sales (P/S) ratio of 0.6. That's ridiculously cheap, demonstrating the extremely low expectations investors have.

I have zero doubts that Peloton's stock will skyrocket in the future, but only if certain events happen.

A big "if"

Investors can correctly assume that if a company experiences declining sales for an extended period of time, then there is a high probability that it will no longer exist at some point. As the economy grows, businesses should register increasing revenue. This is a clear sign that there is interest from customers.

Peloton has struggled in this regard. Revenue in fiscal 2022 and fiscal 2023 (ended June 30, 2023) dropped 10.9% and 21.8%, respectively, on a year-over-year basis. And in the last six months, revenue was down 5%. Management has made it a priority to get back to growth, but this will be extremely difficult when the business struggles to grow its subscriber base.

I'm confident that if Peloton can return to healthy growth, then its share price should appreciate. This isn't a bold statement. Anytime a company can turn things around for the better, investors will take notice.

Executives have tried multiple new initiatives to try to get the ball rolling. This includes a revamped digital app strategy, new selling arrangements with Amazon and Dick's Sporting Goods, a rental program, and partnerships with Lululemon and TikTok. The hope is that Peloton can lean on its strong brand in the fitness space to drive greater revenue.

I also believe that if the company can start to produce positive net income, another top priority for the leadership team, the market will reward shareholders. Peloton reported a $195 million net loss in the three-month period that ended Dec. 31, which was down from a $335 million loss in the year-ago period. Should the bottom line get to the black, it could be the beginning of a financially sustainable enterprise. That would lower the risk profile of this company.

Bringing on new customers, growing revenue, and achieving consistent profitability would help Peloton's current valuation multiple expand considerably. Throughout its history, Peloton's P/S ratio has averaged 4.9. Should the P/S ratio get to that point again, it would create substantial valuation upside.

Easy to be pessimistic

Of course, the lofty scenario described above might have a less than 10% chance of actually happening. It's anyone's guess if Peloton can start to strengthen its fundamentals. The latest financial results added to the pessimism.

I think the big question mark centers on the durability of the company. In other words, there's a very real possibility that Peloton won't even exist five or 10 years from now. It remains on an unsustainable path. A potential recession would cause even more trouble.

Investors have to wonder how big the market is for consumers who want to shell out a four-figure sum for a piece of exercise equipment that they might not even use on a consistent basis. And while the digital app strategy makes sense, mainly because it can boost high-margin recurring revenue, there is a ton of competition in this particular niche of the industry.

It's definitely hard to ignore just how cheap the stock has gotten. But I think the smart move is to wait until there are concrete improvements before even considering buying shares.