Peloton Interactive (PTON 0.77%) went public in 2019 at $29 per share. The company's at-home exercise equipment, fitted with digital screens and streaming capabilities, proved to be incredibly popular when the COVID-19 pandemic struck in 2020.
Sales soared as lockdowns and social restrictions kicked in, and Peloton stock hit a record high of $171 in early 2021. But its incredible growth story began to fall apart that same year as the pandemic receded. Since hitting that peak, Peloton has seen its revenue fall with the company bleeding billions of dollars on the bottom line.
Seasoned executive Barry McCarthy -- who spent years in senior roles at tech giants like Netflix and Spotify -- was hired to right the ship in 2022. He was one of Peloton's greatest assets, but after a valiant effort, he stepped down from his leadership role earlier this month. Meanwhile, the stock is languishing at less than $4 per share, a whopping 98% below its all-time high. Is there any chance it can recover?
Peloton's products appear to be falling out of favor
It's no surprise Peloton's annual revenue peaked in fiscal 2021 (ended June 30, 2021). Once gyms and fitness studios reopened, Peloton's at-home equipment went from being a necessity for fitness enthusiasts to a very expensive luxury item.
Peloton's declining revenue over the last few years dealt McCarthy a very difficult hand. He had to drastically slash costs to ensure the company didn't succumb to its ballooning losses while still leaving the brand in a position to eventually return to growth. He quickly laid off half of Peloton's workforce and outsourced manufacturing to improve unit economics.
Then, McCarthy made Peloton's products available via third-party retailers, which meant customers could buy them through Amazon and Dick's Sporting Goods for the first time ever. Around the same time, Peloton also began selling its equipment on a subscription basis to appeal to customers who can't afford to pay $2,990 upfront for the flagship Bike+, for example.
While the above initiatives have helped to stabilize Peloton's business, they haven't reignited its growth. In fact, simultaneous with McCarthy's departure as CEO, the company announced it will lay off another 15% of its remaining workforce, close more of its physical showrooms, and further optimize its marketing spending. The goal is to improve Peloton's cash flow, but I'm not sure how beneficial that will be if it causes sales to slump even further.
Peloton's financial position is fragile but improving
Peloton reported its fiscal 2024 third quarter (ended March 31) financial results on May 2. Its revenue fell 4.4% year over year to $717.7 million while missing Wall Street estimates.
The company's guidance for the full fiscal year calls for revenue to shrink 4% to about $2.7 billion, which would mark the third consecutive annual decline.
Peloton's bottom line is the real concern, though, as the company lost $167.3 million last quarter. That was still an improvement from its $275.9 million net loss in the year-ago period -- ongoing cost cuts reduced operating expenses 15% year over year.
The company did manage to eke out a small amount of free cash flow -- $8.6 million -- for the first time in three years, and improving this metric is a key focus for management. Why? Because Peloton only has $794.5 million in cash remaining on its balance sheet with long-term debt worth $692.1 million. There is little financial breathing room going forward.
Image source: Peloton Interactive.
Can Peloton stock recover from here?
Peloton can survive this turmoil, but whether it one day thrives again is unknown. Investors typically avoid shrinking businesses because they tend to underperform the market, and so far, this company hasn't proven it can return to growth.
And while cutting costs might be necessary in this case, doing so can also be dangerous. It can lead to a perpetual spiral of revenue declines, which call for further cost cuts to prevent losses, which results in even less revenue.
The problem is Peloton doesn't have enough financial resources on its balance sheet to take risks or experiment with new growth initiatives, which makes a sustained recovery all the more challenging.
Finally, it's unlikely Peloton will be able to take on any more debt given its current situation, and the 98% decline in its stock price will make an equity raise extremely dilutive to existing shareholders. Therefore, any cash infusion will be hard to come by.
Will Peloton stock recover? Any signs of revenue growth will likely push the stock higher, but it's unlikely to ever approach its all-time high again. I certainly wouldn't be a buyer right now, especially with so many other quality opportunities out there.
