Is Peloton Interactive Stock a Buy?

Interactive Platoon (NASDAQ: PTON) is arguably the poster child for pandemic-era broken growth stories. The connected exercise bike maker went public at $29 per share in September 2019, but its stock opened at just $27 and fell below $20 the following March as investors questioned the appeal of its expensive exercise bikes and subscription-based distance spin classes.

However, the pandemic then ignited a fire in Peloton’s business as gyms closed and more people stayed home. In fiscal 2020, which ended in calendar June, Peloton’s revenue doubled to $1.83 billion, its total Connected Fitness subscriber count more than doubled to reach 1.09 million and his total number of workouts more than tripled.

Image source: Peloton.

That momentum continued in fiscal 2021. Peloton’s revenue grew another 120% to $4.02 billion, its Connected Fitness subscribers jumped 114% to 2.33 million, and his total number of workouts nearly tripled. As a result, Peloton’s stock hit an all-time high of $167 last January.

But today, shares of Peloton are trading at just $8 a share. Bulls rushed to the exits as his growth slowed in a post-lockdown market, more competitors entered the ring and he fumbled the launch of his connected treadmills with a disastrous encore. The resignation of its CEO, thousands of job cuts and price cuts for its namesake bike also signaled it was in deep trouble – and rising interest rates exacerbated its strong sell-off.

Nonetheless, contrarian investors might still wonder if Peloton, which now trades less than once this year’s sales, is now a deep value play. Let’s take a fresh look at his business to find out.

How bad has Peloton’s post-pandemic downturn been?

Peloton’s year-over-year growth in connected fitness subscriptions, total workouts, and total revenue have all slowed significantly over the past year.

Growth (YOY)

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Connected Fitness Subscriptions

135%

114%

87%

66%

42%

Total number of workouts

238%

75%

55%

26%

8%

Revenue

141%

54%

6%

6%

(15%)

Data source: Peloton.

Analysts expect Peloton’s revenue to decline 11% to $3.59 billion for the full year, but increase 5% to $3.76 billion in 2023.

In addition to tough pandemic comparisons, Peloton faces competition from cheaper connected exercise bike makers like Echelon, other connected fitness products like lululemonit is (NASDAQ: LULU) Mirror and subscription-based remote fitness programs like Apple (NASDAQ:AAPL) Form +. This intense pressure prompted Peloton to cut prices on its bikes, expand its product line with treadmills, and introduce new fitness programs that didn’t require any of its first-party equipment.

However, this strategic shift also significantly reduced Peloton’s gross and adjusted revenue. EBITDA (earnings before interest, taxes, depreciation and amortization) – even after cutting 2,800 jobs, or about 20% of its workforce, earlier this year.

Metric

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Gross margin

35.2%

27.1%

32.6%

24.7%

19.1%

Adjusted EBITDA margin

5%

(4.8%)

(29%)

(23.5%)

(20.1%)

Data source: Peloton.

On a GAAP (generally accepted accounting principles), Peloton posted a staggering net loss of $1.52 billion in the first nine months of fiscal 2022, compared to net income of $124 million in fiscal 2021.

To stop this bleeding, Peloton recently announced that it would stop making its own products and instead outsource all of its production to Taiwanese manufacturer Rexon Industrial.

The big change could help Peloton gradually pare its losses, but analysts still expect the company to take an adjusted EBITDA loss of $806 million in fiscal 2022 from a positive $254 million. million in fiscal year 2021. However, they also expect it to reduce that number. loss to $114 million in fiscal 2023 as it aggressively controls spending.

We should take these expectations with a grain of salt, especially since a recession would likely prevent consumers from buying Peloton’s pricey bikes — which still cost at least $1,445 after its latest price cuts.

Peloton is not yet a flipping game

Peloton’s lack of profits and its high debt ratio of 1.5 will make it an unattractive investment as interest rates rise, but it is unlikely to go bankrupt in the next few quarters. It still ended its third quarter of 2022 with $879 million in cash and cash equivalents, and it has yet to draw a single dollar on its $500 million revolving credit facility.

However, I cannot recommend buying Peloton until its revenue growth and margins have really stabilized. Its shares may seem very cheap right now, but they still haven’t garnered serious interest from companies like Apple or Nike — both of whom have been cited as potential suitors in the past — even at its current enterprise value of just $4.2 billion. Simply put, investors shouldn’t view Peloton as a deep value play just yet.

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Leo Sun holds positions at Apple. The Motley Fool holds positions and recommends Apple, Lululemon Athletica, Nike and Peloton Interactive. The Motley Fool recommends the following options: $120 long calls in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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