Peloton (NASDAQ:PTON) stock has taken investors on a roller-coaster ride since its IPO in 2019. The firm went public at $29 per share and zoomed past $170 in 2020 on the back of a pandemic-fueled rally. Today, the stock trades 97% below all-time highs, valuing the company at $1.6 billion. It’s also down 66% in the last 12 months and continues to remain under pressure despite a broader market recovery. I am bearish on the stock due to its negative profit margins, weak balance sheet, and sluggish top-line growth.
An Overview of Peloton
Peloton claims to be the largest interactive fitness platform in the world, with more than 6.6 million members. Over the years, it has focused on creating connected, tech-enabled fitness and instructor-led boutique classes for its members. Its instructors teach classes across various disciplines that include indoor cycling, yoga, strength training, meditation, and many others.
Peloton has two primary business segments — Connected Fitness Products and Subscriptions. The Connected Fitness Segment consists of bike sales and other fitness accessories, while the Subscriptions business involves monthly subscription credits from live studio classes.
Why Is Peloton Stock Under Pressure?
Similar to other home exercise companies, Peloton’s products were in high demand during the COVID-19 pandemic. As lockdown restrictions were imposed and gyms were shut, people bought Peloton’s bikes hand over fist between 2020 and 2021. However, once the restrictions were relaxed, demand fell off a cliff.
Peloton’s sales grew from $1.82 billion in Fiscal 2020 (ended in June) to $4 billion in Fiscal 2021. However, its sales have since declined to $3.58 billion in 2022 and $2.8 billion in 2023.
Two years back, the company appointed Barry McCarthy as the CEO to steady its sinking ship, but Peloton continues to disappoint on multiple fronts. Since bringing in McCarthy, Peloton has announced partnerships with Amazon (NASDAQ:AMZN) and Dick’s Sporting Goods (NYSE:DKS), diversifying its sales and distribution channels. Moreover, Peloton also began selling its premium bikes on a subscription basis to lower the initial cost of ownership.
Despite these efforts, Peloton is struggling to grow its sales and is on track to report another year of decline in Fiscal 2024.
Peloton grew aggressively during COVID-19, resulting in higher expenses. It expanded its workforce, increased its marketing budget, and plowed in resources to maintain its inventory. But as demand evaporated, the company reported a net loss of $2.8 billion in Fiscal 2022.
McCarthy was forced to cut the workforce by 50% and even outsourced manufacturing to offshore partners. Now, it aims to focus on building a subscription-based digital business, which should improve profit margins. However, this venture experienced a decline in subscribers in the December quarter.
How Did Peloton Perform in Fiscal Q2 2024?
In Fiscal Q2, Peloton reported revenue of $743.6 million, a decline of 6% year-over-year. Its adjusted losses narrowed to $0.54 per share from $0.98 per share in the year-ago period. Comparatively, analysts forecast Peloton to report sales of $733.5 million and a loss of $0.53 per share in Q2.
Further, Peloton’s Subscription sales rose 3% to $424.5 million. While paid connected fitness subscriptions rose 1% to three million, the total number of members fell by 4% to 6.4 million.
Despite its focus on cost savings, Peloton reported an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of -$81.7 million in Q2 compared to a loss of $122.4 million in the year-ago period.
Its net losses have narrowed, but the company is also struggling to grow its revenue, which suggests Peloton needs to spend heavily to acquire, engage, and retain its subscribers.
What Next for Peloton Stock?
Analysts tracking Peloton expect it to remain unprofitable in the near term but expect losses per share to narrow from $1.43 in Fiscal 2024 to $1.12 per share in Fiscal 2025. The company is also forecast to end 2024 with revenue of $2.70 billion, its third consecutive year of decline.
Still, Peloton’s falling sales and negative profit margins raise concerns about its ability to sustain its burn rate until it achieves consistent profitability. The company concluded Q2 with $738 million in cash, lower than $871 million the previous year. Moreover, Peloton faces the challenge of servicing its total debt of $2.3 billion, which includes significant interest payments.
Peloton does not have deep pockets, which means it would not be able to allocate resources toward developing an innovative line of fitness products. Its loss-making business will also increase its cost of debt, indicating that Peloton will be forced to raise equity capital, diluting existing shareholder wealth in the process.
What Is the Target Price for Peloton Stock?
Out of the 21 analysts tracking Peloton, five recommend Buying, 14 recommend Holding, and two recommend Selling, indicating a Hold consensus rating. The average PTON stock price target is $6.29, indicating upside potential of 42.8% from current levels.
The Takeaway
Peloton is a high-risk investment and does not have a compelling risk-reward profile. There are several other stocks better than Peloton in terms of fundamentals that are positioned to deliver market-beating gains in 2024 and beyond. Peloton’s turnaround strategy is not bearing fruit, and it has to report consistent profits before running out of cash.
