Exercise equipment maker Peloton Interactive, Inc. (PTON), which is based in New York City, is one of the world’s leading interactive fitness platforms. On September 9, the company announced the launch of its apparel brand, Peloton Apparel, marking its first private label collection. As a result, PTON’s shares jumped 9.8% in price on Thursday. However, while the connected fitness giant’s foray into the athletic apparel market has caught investors’ attention, the stock has tanked 13.5% in price over the past month and 35.7% year-to-date.

Closing yesterday’s trading session at $107.08, PTON is trading 37.4% below its 52-week high of $171.09. 

The company’s decision to lower the price of its Peloton Bike could negatively impact its profitability in the near term. Furthermore, a bleak business outlook for the first quarter of its fiscal year 2022, and faltering demand for its fitness equipment amid the rapid COVID-19 vaccination roll out and re-opening of gyms, could cause its shares to suffer a  downtrend in the coming months.

Here is what could influence PTON’s performance in the near term:

Lawsuits and Ongoing Investigations

Last month, Bragar Eagel & Squire, P.C. Lifshitz Law Firm, P.C., Johnson Fistel, LLP, and several other law firms began investigating certain officers and directors of PTON on behalf of their shareholders. Complainants allege that the company made materially false and misleading statements about its business. Also, in June, a securities fraud class-action lawsuit was filed by the Jakubowitz Law against PTON. Additionally, the U.S. Department of Homeland Security and the U.S. Department of Justice have issued subpoenas for information on PTON’s reporting of injuries related to its products. Moreover, the fitness equipment operator is also being investigated by the Securities and Exchange Commission for its public disclosures related to  injuries reported by its customers. These inquiries could hinder the company’s near-term prospects.

Business Inefficiencies

In May, PTON recalled more than 125,000 Tread+ treadmills and roughly 1,050 Tread products in the United States after the machines were linked to the death of a child in an accident and dozens of other injuries reported by users. Sen. Richard Blumenthal, chair of the Subcommittee on Consumer Protection, Product Safety, and Data Security, said, “Peloton unacceptably put consumers at risk, obstructed the CPSC’s investigation and its consumer warnings.” This controversy could potentially damage the company’s reputation and lead to high financial costs.

Furthermore, PTON recently lowered the price of its Peloton Bike across all  markets to $1,495, or $39 per month with its 39-month financing plan. In addition,  increased supply chain and logistics expenses, freight rate increases, and higher commodity costs could impact the company’s top- and bottom-line growth in the near term.

Unstable Financials

Although PTON’s total revenue rose 54.3% year-over-year to $936.9 million in its  fiscal fourth quarter, ended June 30, 2021, its gross profit declined 12.2% from its  year-ago value to $253.6 million. It reported a $301.7 million operating loss, compared to operating income of $90 million in the prior-year period. The company’s operating expenses rose 179.4% year-over-year to $555.4 million. Moreover, PTON’s net loss came in at $313.2 million for the quarter versus $89.1 million in net income in the fourth quarter of 2020. Also, its adjusted EBITDA stood at a negative $45.1 million.

PTON’s trailing-12-month net income margin and EBITDA margin are negative 4.7% and 2.2%, respectively. And its  trailing-12-month ROA, ROE, and ROTC are negative 4.2%, 11%, and 3.3%, respectively.

Stretched Valuation

In terms of forward EV/Sales, PTON’s 5.39x is 258.5% higher than the 1.5x industry average. Likewise, its 5.47x forward Price/Sales is 344.5% higher than the 1.23x industry average. The  stock’s 25.32x forward Price/Book is 630.6% higher than the 3.47x industry average.

POWR Ratings Reflect Bleak Prospects

PTON has an overall F rating, which translates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. PTON has a D grade for Quality. This justifies the stock’s negative profit margin.

It has an F grade for Value, which is in sync with its higher-than-industry Price/Sales ratio.

Also, the company has a Growth grade of F, consistent with its bleak growth prospects.

In addition to the grades we’ve highlighted, one can check out additional PTON ratings for Sentiment, Momentum, and Stability here. The stock is ranked #69 of 71 stocks in the D-rated Consumer Goods industry.

Bottom Line

Analysts expect PTON’s EPS to decline 650% in the current quarter and 455.6% next quarter. While the interactive fitness platform operators’ recent move into the athletic apparel market has been driving its shares lately, the reduction in the price of its award-winning bike and the investigations surrounding the safety issues of its equipment are major concerns for investors. Also, the increasing  re-opening of the gyms could hurt the demand for the company’s fitness subscriptions. So, we think the stock is best avoided now.

How Does Peloton (PTON) Stack Up Against its Peers?

While PTON has an overall POWR Rating of F, one might want to consider taking a look at its industry peers Société BIC SA (BICEY) and Ennis, Inc. (EBF), which have an A (Strong Buy) rating.

PTON shares were trading at $115.89 per share on Friday morning, up $8.81 (+8.23%). Year-to-date, PTON has declined -23.62%, versus a 20.58% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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