Peloton Interactive's (PTON 4.29%) rapid rise and even faster fall make for a great business case study. Shares were once a massive winner for investors, but since March 2021, they have cratered a jaw-dropping 96% (as of March 6). The company continues to deal with ongoing struggles as it tries to get back in shape.
Where will this beaten-down consumer discretionary stock be in three years? I see two potential scenarios.
If all goes right
If we assume that CEO Barry McCarthy and his leadership team can successfully orchestrate a turnaround, then Peloton will undoubtedly be the darling on Wall Street once again.
The company's core issue in recent times has been to drive greater demand for its products. Growth was outstanding prior to the pandemic and during its height, but the normalization of consumer behavior has led to a dramatic slowdown.
McCarthy has implemented some changes, including expanding distribution to third-party retailers like Amazon and Dick's Sporting Goods, content partnerships with Lululemon and TikTok, and a rental program to ease the cost burden for customers. If these initiatives really catch on, by 2027, Peloton could have a much larger user base than the current 3 million connected-fitness subscribers and 718,000 paid digital app memberships.
Getting back to registering top-line gains is key. But it's even more important for Peloton to achieve profitability. Management has focused relentlessly on cutting costs, which has helped shrink the net losses. Should sales rise at a double-digit annual pace going forward, coupled with ongoing efficiency gains, this could be a free cash flow machine.
In this bullish scenario, investors will be rewarded. The stock currently trades at a price-to-sales multiple of 0.56, which is substantially lower than its historical average. Should the company consistently post revenue and membership growth, while at the same time generating positive earnings quarter in and quarter out, that valuation will get a boost.
Setting realistic expectations
I give the optimistic outlook mentioned above an extremely slim chance of actually occurring, though. Peloton continues to struggle in spectacular fashion.
Its second-quarter 2024 (ended Dec. 31, 2023) revenue of $744 million was down 6% year over year, despite all those strategic initiatives that have already been introduced. It's striking to observe how demand has really just fallen off a cliff.
Peloton couldn't sell its hardware fast enough during the depths of the Covid-19 crisis. Now it seems like no one wants these things. In fact, the business added just 25,000 net new connected-fitness subscribers (those who purchased a piece of equipment) in the last 12 months.
There's no compelling reason to believe that Peloton can jump-start its growth going forward. There is so much competition in the fitness industry, from other digital services and equipment makers to boutique studios and nationwide fitness chains. All are vying for customers to not only pay for their products and services, but to stick to their routines, which is not a good bet.
It looks like the initial excitement around Peloton's ability to create an innovative on-demand platform has now faded. To their credit, executives have basically been throwing spaghetti at the wall to see what sticks. They really have nothing to lose at this point. But their efforts aren't bearing enough fruit to please investors.
Based on the company's latest trends, I view this more tempered outlook -- particularly that the challenges for the business won't go away -- as having the highest chance of happening. Consequently, it looks like Peloton is set to continue disappointing its shareholders over the next three years.
