Peloton Interactive has lost 93% of its market capitalization – a colossal $51 billion – since its peak in December 2020. Does that make stocks a bargain?
I know Peloton CEO Barry McCarthy will view me as an ‘naysayer’ – but I think his stock remains overvalued and the people behind his 12.9% short stake will profit – unless Peloton does not become a meme action.
On July 13 – when the Peloton was trading at $8.93 – I wrote that the stock was expected to fall further. However, that was close to its all-time low – it has since risen 23% to around $11.
Still, I see four reasons to bet that shares of Peloton – which calls itself a “connected fitness equipment maker” – will fall further:
- Disappointing quarterly results and forecasts
- Crushing Industry Headwinds
- Cash deterioration
- Questionable growth strategy
(I have no financial interest in any securities mentioned in this post).
Horrendous quarterly results and forecasts
Stock prices tend to rise when a company exceeds Wall Street revenue targets and raises its outlook for the future. Miss either or both and your stock plunges.
After announcing its results for the quarter ending June 2022, Peloton’s stock fell 18.3%. That wiped out most of the more than 20% rise in its stock on August 24, when it announced it would be selling some of its inventory on Amazon.
According to CNBC, Peloton’s results fell short of estimates:
- Revenue. Revenue fell 28% to $678.7 million, about $30 million lower than analysts expected
- Loss. Peloton’s net loss of $1.24 billion was $927 million higher than a year earlier and its loss per share of $3.68 was 3.5 times its year-earlier result.
- Provide. Peloton did not provide guidance for 2023. For the quarter ending September, the company said “it sees subscribers remaining flat and revenue in the range of $625 million to $650 million – down 25% from year-over-year – which is below analysts’ estimates,” CNBC noted.
To be fair, Peloton reported a 36% increase in subscription revenue to $383.1 million — from so-called connected fitness subscribers who own, say, a Peloton bike and pay a monthly fee for fitness classes. live and on-demand training – which accounted for 56.4% of the company’s total revenue.
Peloton is optimistic about its ability to overcome its challenges. As McCarthy wrote in a letter to Peloton shareholders, “Opponents will examine our [fourth-quarter] financial performance and see a falling revenue melting pot, negative gross margin and higher operating losses. But what I see is meaningful progress that boosts our comeback and Peloton’s long-term resilience.
Crushing Industry Headwinds
Since February, when McCarthy took over as CEO, Peloton has done things I would expect of a CFO — which was McCarthy’s role at his former employer. Netflix.
By that I mean he raised prices and cut costs. How? As CNBC reported, “Peloton raised membership fees, hiked prices on some equipment, laid off thousands of workers, tested a leasing option, scrapped last-mile delivery, and shifted all production to third parties. “.
Unfortunately, cost-cutting measures and price increases are not helping Peloton weather the headwinds of overwhelming industry growth. The most powerful of these is that consumers stocked up on hardware and services while stuck at home during the height of the pandemic.
Now that people can go out and travel — most of the time without even wearing a mask — they can’t wait to exercise outdoors or hit gyms with other people. Their Peloton bikes and treadmills are gathering more and more dust. There is no incentive for people to buy more of it and absent a new pandemic sending people back indoors, there are no tailwinds for growth for this industry.
Peloton’s latest results testify to the absence of growth relays. It ended the quarter with 2.97 million connected fitness subscriptions, roughly the same number as the previous quarter. Its total membership, however, was down about 143,000 from the previous quarter to 6.9 million.
Meanwhile, connected fitness subscribers are turning in at 1.41%, about double the rate from a year ago, CNBC noted. It seems to me that with inflation at relatively high levels and interest rates rising, more and more subscribers will stop paying Peloton’s higher fees.
Another growth headwind for Peloton is overcoming what The Times called “issues with public perception of its fitness equipment.” As the Times noted, those issues include its May 2021 decision to recall “its Tread+ and Tread machines after injuries and the death of a child were linked to the products.” He also suffered from problems with broken pedals, injuries and negative portrayals of his products on television shows such as “And Just Like That” and “Billions”.
Deterioration of cash position
Peloton sees itself becoming cash flow positive by June 2023. As McCarthy wrote to shareholders, “We are on track to achieving sustainable positive free cash flow.”
Peloton ended June 2022 with $1.25 billion in cash — after consuming nearly $2.4 billion in free cash flow in the previous year. Specifically, Peloton spent “$412 million in cash last quarter, after spending $650 million in each of the previous two periods,” The New York Times noted.
I don’t know if Peloton has enough money to survive another year. The answer depends on its ability to raise more cash and/or reduce its cash burn rate.
However, if he continues to spend money at last year’s rate, it will run out in about six months – which could be extended if he dips into his $500 million line of credit.
Questionable growth strategy
McCarthy seems to think that Peloton can replicate Netflix’s subscription strategy of personalizing content for each user.
To that end, he tries to expand Peloton’s customer base from affluent to more thrifty customers. To do this, it intends to allow low-income consumers to access its workout classes through screens on competitors’ exercise products. He also expects to be able to add customers by selling gear and apparel on Amazon and allowing people to rent bikes on a subscription basis.
I think McCarthy is at a significant disadvantage because he doesn’t have a deep understanding of Peloton’s customers. Jefferies analyst Randy Konik wrote to clients Aug. 25 that Peloton’s bleak outlook for the current period and its lack of full-year guidance suggests things at Peloton are far worse than previously thought. McCarthy last February.
Konik – who seems to have a better understanding of the market – noted that people are returning to gyms. He expects Peloton members who are still paying the monthly subscription and not using the bike to cancel in the months and years to come, especially as Peloton prices rise.
McCarthy may be pursuing a strategy that causes subscriber numbers to drop, much like what happened to Netflix. Granted, Peloton’s source of competition isn’t the same as Netflix’s. Netflix is losing out to more capable incumbents.
Peloton is in trouble because its customers are shrinking the entire product category and the low-income people it wants to target won’t pay higher subscription fees for something they need much less than food, gasoline and housing.
I wonder if McCarthy’s bullish targets will survive the market headwinds and the rapid pace at which Peloton is burning through its remaining cash.