Peloton Interactive (PTON +4.58%) has been pedaling in the wrong direction. Customers just aren't as excited about the fitness company's products and services as they were a few years ago, and the stock is taking a major hit as a result.
As of this writing, shares trade at a price-to-sales ratio of less than 0.6. That's about as low as the valuation has ever been in Peloton's entire public history. But perhaps some bullish supporters are hoping that things will get better for the company.
Can this ridiculously cheap consumer discretionary stock see its price skyrocket between now and 2030? Here's what investors need to know.
Dealing with a new reality
Looking back at the past few years, Peloton would make for an interesting case study about the pandemic's impact on a business. Even before the health crisis, the company was growing rapidly, bringing on new customers who gravitated toward its exercise bikes and treadmills that allowed for on-demand workout classes. Its market capitalization approached $50 billion a little over three years ago, showing investors' enthusiasm for the stock.
Blame it on waning consumer interest or softer economic conditions, but Peloton is struggling these days because demand has dried up. The leadership team has had no choice but to try a bunch of different initiatives to find what works. Peloton now sells its products on Amazon and at Dick's Sporting Goods locations. The business started a bike rental program, launched a revamped digital app strategy, and partnered with Lululemon and TikTok to provide fitness content.
These measures haven't moved the needle much. Revenue still fell year over year last quarter. And Peloton continues to report hundreds of millions of dollars in net losses.
NASDAQ: PTON
Key Data Points
Cheap for a reason
Investors who are convinced that the business can turn things around likely won't find a better entry point than right now, especially since the stock trades 97% below its peak price set in January 2021. If Peloton can start to make serious progress -- by growing its customer base, posting sales gains, and getting to profitability -- I believe shares will soar over the next few years.
But this outcome is far from certain. In other words, I view Peloton as a classic value trap right now.
Even CEO Barry McCarthy is unlikely to bolster shareholders' confidence. "I don't really know what the long-term growth rate of the market is," he said on the fiscal Q2 2024 earnings call when asked about his perspective on the overall industry. At least he's being transparent and honest.
McCarthy then added that he believes Peloton could get a boost from an aging population and their increased focus on health and wellness, coupled with their higher disposable incomes. Moreover, he pointed to product innovation, corporate wellness penetration, and raising awareness of the brand. None of this stuff is breakthrough information, and they were all areas that the previous management team emphasized as well.
I think there is a deeper issue here that Peloton is dealing with that is proving to be extremely difficult to figure out: the fact the finding lasting success in the fitness industry is a virtually impossible endeavor. The hot new thing falls out of favor quicker than it rose to prominence. And in Peloton's case, it's betting on consumers to stick to their workout regimens, which seems like a terrible gamble.
Investors should also worry about the state of the economy as a near-term risk. Given the inverted yield curve, record-high credit card debt, and weak retail sales, there's a very real possibility that the U.S. enters a recession soon. A business that sells discretionary exercise equipment and fitness services will likely be negatively impacted.
Until Peloton starts to report concrete improvements on a consistent basis, investors should stay far away from the stock as a potential long-term holding.
