Peloton Interactive (PTON +0.85%), once a Wall Street darling that saw its stock surge 434% in 2020, has come crashing down almost as fast as its rise. Shares are down 95% from their all-time high set nearly two years ago as the business grapples with a new post-pandemic reality that is making it extremely difficult to drive higher sales and achieve profitability.
Let's examine this consumer discretionary stock to see if it is a good investment right now.
NASDAQ: PTON
Key Data Points
Weak demand and terrible financials
Perhaps no other business benefited more from the coronavirus pandemic than Peloton. People needed to find ways to work out at home, and so sales surged 100% in its fiscal 2020 (ended June 30 of that year) and 120% in fiscal 2021. The company was posting healthy gross margins, and its operating margin was quickly approaching a break-even point. Peloton was flying high as its subscriber base continued soaring at a rapid clip.
The mistake made by previous management -- as well as shareholders -- was assuming this remarkable growth would last forever. Economies opened back up, with authorities loosening up stay-at-home restrictions. And people were comfortable going to gyms again like they did in 2019.
The hard truth was that Peloton was facing a new reality where growth would be far more difficult, especially as compelling products were introduced by rivals, like innovative equipment from Tonal and Lululemon Athletica's Mirror.
In the most recent quarter (the first quarter of 2023, ended Sept. 30), Peloton generated revenue of $616.5 million, down 23% from the prior-year period. This marked the third straight quarter that sales dropped on a year-over-year basis, in each case by 23% or more.
Consequently, losses have widened. Over the past 18 months, Peloton's cumulative operating loss totaled $2 billion. For comparison's sake, the company's market capitalization is $2.7 billion.
Falling demand is a major problem for any business, but in Peloton's case, what made matters much worse was the fact that the company was investing heavily in its manufacturing and logistics capabilities, forgoing profitability to continue attracting more users. When this script flips, it leads to a deteriorating financial situation.
To its credit, management is open to testing new distribution channels to drum up sales. Peloton products are now available on Amazon's website and at Dick's Sporting Goods retail locations.
On the first-quarter Q1 2023 earnings call, CEO Barry McCarthy said:
How is it going so far? Well, Amazon has outperformed our expectations for sure. We just launched Dick's Sporting Goods. We have high expectations for it, but it remains to be seen how it will perform over time.
I'm not sure how much this will move the needle for the business. It's not like Peloton's brand awareness has been lacking up to this point, so I don't think most of those who are walking into a Dick's Sporting Goods location or searching on Amazon have never heard of the company and its products before. These are just ways to increase accessibility for customers.
It's a serious cause for concern that Peloton has completely abandoned its exclusive direct-to-consumer model in favor of this new third-party distribution strategy.
For the company's 2023 fiscal year, which will end in June, Wall Street consensus analyst estimates call for revenue to fall 25% and for a net loss of $774 million. The company appears to be a long way from getting back into shape.
Investors should skip this ride
I believe that the best course of action for investors is simply to avoid buying the stock right now, even though shares are trading at close to their lowest price-to-sales multiple since the company went public in September 2019.
To be fair, Peloton has created an exciting user experience with a wonderful combination of software and hardware that mimics in-person workouts. And it has pioneered the connected-fitness category.
But a good product doesn't always mean a good investment. I would need to see sales and subscribers start rising at a solid rate again before I even consider adding Peloton to my portfolio.
