Exercise equipment maker and former pandemic darling Peloton (PTON) recently made one very smart move. That move will change the way it builds products for sale and might have been the best thing it could do. It might also have been the best thing it could do a year ago. Does the old adage “better late than never” apply here?
The latest news for Peloton might help unless it has come too late to do much good. Peloton announced that it would ramp up its partnership efforts with Rexon International, a Taiwanese firm.
Peloton will go completely to third-party manufacturing efforts in the production of all its exercise equipment. The move will ultimately help Peloton cut costs as it struggles to get back on its feet post-pandemic.
PTON was up 5.6% in pre-market trading earlier, but it gave up some of its gains so far today. The stock is currently up 2.8% on the day.
Meanwhile, I’m bearish on Peloton. Its latest move is a great idea, but the problem here is that it’s a great idea that likely came too late to do much good for the struggling company.
The last 12 months for Peloton have been a long ride down. Back in July 2021, the company was worth about $126 per share. A catastrophic plunge followed by a slow disintegration later, and the company ultimately broke through the $9 level to reach today’s pricing.
Wall Street’s Take on PTON Stock
Turning to Wall Street, Peloton has a Moderate Buy consensus rating. That’s based on 14 Buys, 10 Holds, and two Sells assigned in the past three months. The average Peloton price target of $21.48 implies 133.2% upside potential.
Analyst price targets range from a low of $12 per share to a high of $35 per share.
Investor Sentiment is Mostly Dark, Except for One Odd Bright Spot
For the most part, Peloton’s investors are not happy with the company. A company that goes from $126 to $9 in the space of a year or so generally doesn’t get happy investors. Given that Peloton has a Smart Score of 2 out of 10 on TipRanks—the second-lowest level of “underperform”—it’s clear that sentiment is not running Peloton’s way.
Hedge fund involvement is one clear demonstrator of this fact. Based on the results of the TipRanks 13-F Tracker, hedge funds sold 7.2 million shares of Peloton in the last quarter. That’s the third consecutive quarter that hedge funds reduced their involvement in Peloton.
The lone bright spot for Peloton comes from insider trading. Insiders have been buying Peloton pretty heavily since last October. In fact, since then, Buy transactions have outpaced Sell transactions by 18 to 5.
Going back to the full year, meanwhile, that number shifts. For the full year, there were 26 Buys to 34 Sells. It’s clear Peloton insiders are taking advantage of lower prices to Buy back in.
Meanwhile, for retail investors—at least those who hold portfolios on TipRanks—the picture is about as negative as it is for the hedge funds. In the last seven days, the number of TipRanks portfolios holding Peloton was down 0.6%. For the last 30 days, meanwhile, this number was down 1.4%.
Meanwhile, Peloton shows no signs of starting a dividend, nor does it have a functioning dividend history. Share price growth was the clear goal. Given the rate at which it’s backtracked over the last year, share price recovery is perhaps a more appropriate concern.
A Good Idea That Came About Two Years Too Late
Back in May 2021, Peloton first announced plans to build a dedicated Peloton factory in the United States. This was a few months after gyms started to reopen in many states following the worst of the COVID-19 lockdowns. Even hardcore states like Michigan started reopening gyms in late 2020.
The combination of reopening gyms and the likely ripple effect that would pose on home gyms prompted many to wonder if Peloton’s demand would take a hit. Indeed, it seemed to do just that. Peloton scuttled its plans to build that factory in February 2022 as part of a larger cost-cutting move.
Fast forward to today, and not only is Peloton not building factories, but it’s also shuttering the manufacturing it already has. Factories operated by Tonic Fitness Technology—which Peloton bought back in 2019—are also on the chopping block.
It’s also still unclear what this means for Precor, an exercise equipment maker Peloton bought back in late 2020 for $420 million.
Basically, Peloton seems to be running into the exact same thing some were afraid of back in late 2020. There would come a time when everyone who wanted a Peloton device had one, and sales would crater. This would only be made worse by reopening gyms, which was only a matter of time from the March 2020 shutdowns in response to COVID-19.
Ramped-up production might have helped in 2019, especially ahead of the demand spike in 2020. However, ramped-up production in 2021? That’s way too late to help. It missed out on fully realizing the COVID-19 demand spike and now has a hangover from too-rapid production expansion.
Now, Peloton demand is dropping, gyms are pretty much as open now as they were in 2019, and Peloton’s got excess capacity at a time when it needs it the least. That’s a serious problem, and it’s reflected in the plunge the share price has seen over the last several months.
Concluding Views – There Aren’t Many Paths to Victory Here
Cost-cutting measures are a good idea for Peloton, certainly. However, Peloton also needs to ramp up its revenue to turn around its already-significant losses. Investor sentiment features are almost universally negative, except for the almost-inexplicable purchases made by Peloton insiders.
Granted, Peloton’s phenomenally low price right now—and very real potential to not go much lower than we’ve already seen—might make it an interesting flier for somebody willing to lay down a few hundred dollars to pick up a nice chunk of Peloton.
Honestly, though, the odds of Peloton recovering to anywhere near last year’s numbers are minimal. Peloton’s plans to sell subscription exercise services aren’t likely to hold up well in the face of a recession afoot. Peloton was a lockdown darling, and most lockdown darlings haven’t done so well in a post-lockdown environment.
I’m bearish on Peloton because, despite a very tempting entry point, there don’t seem to be many paths to victory for this stock.
Unless it can figure out a way to make itself more attractive than the physical gyms it sought to replace, Peloton machines will likely end up fancy coat hangers in bedrooms everywhere. Either that or garage sale fodder – and its stock likely won’t be far behind.
