One of the largest interactive fitness platform providers, Peloton Interactive, Inc. (PTON - Get Rating), announced plans in May to build its first U.S. factory in Ohio. It announced plans in March 2021 to expand in Australia. However, the New York City-based company has been facing a  backlash over its treadmills’ safety. Its stock has lost 15.8% in price over the past six months and 14% over the past month to close yesterday’s trading session at $101.48.

Yesterday, the company resumed selling the lower-end version of its treadmill—its $2,495 Tread product—across the United States, United Kingdom, and Canada. However, sales of its higher-end Tread+, priced at $4,295, are still on hold. As a result, BMO Capital Markets analyst, Simeon Siegel, cut PTON’s price target to $45 per share. 

Furthermore, the company’s profitability is expected to be negatively impacted in the near term due to higher costs and a  decline in the prices of its exercise bikes.

Here are the factors that we think could shape PTON’s performance in the coming months:

Product Recall

On May 5, 2021, the U.S. Consumer Product Safety Commission (CPSC) and PTON announced the recall of both of PTON’s treadmill machines over safety concerns. This  affected roughly 125,000 Tread+ machines and approximately 1,050 Tread products in the United States. This move came after the company said on April 17, 2021, that “Peloton is disappointed that, despite its offers of collaboration, and despite the fact that the Tread+ complies with all applicable safety standards, CPSC was unwilling to engage in any meaningful discussions with Peloton before issuing its inaccurate and misleading press release.”

PTON had issued a voluntary recall for  pedals in October 2020 for roughly 27,000 bikes after receiving 120 consumer reports of pedal breakages and 16 reports of leg injuries.

Ongoing Investigation

Several law firms have launched an investigation against PTON on behalf of the purchasers of its securities between September 11, 2020, and May 5, 2021. It is alleged that the company made several materially false and misleading statements, and that safety was not a priority for PTON. In addition, the U.S. Department of Justice and the Department of Homeland Security subpoenaed the company on August 27 for documents and information related to injuries associated with its exercise machines.

Weak Financials

PTON’s total revenue declined 25.8% sequentially to $936.90 million for the fiscal fourth quarter ended June 30, 2021. The company’s gross profit decreased 12.2% year-over-year to $253.60 million, due primarily to recall-related costs and increased supply chain and logistics expenses. Its net loss came in at $313.20 million compared to $89.10 million in net income in the year-ago period. Also, its loss per share came in at $1.05 compared to an EPS of $0.27 in the prior-year quarter.

Stretched Valuation

In terms of forward EV/S, PTON’s 5.83x is 276.1% higher than the 1.55x industry average. Its 5.85x forward P/Sis 350% higher than the 1.30x industry average. Furthermore, the stock’s forward P/B and P/CF of 27.09x and 56.40x, respectively, are higher than the 3.59x and 13.07x industry averages.

POWR Ratings Reflect Bleak Prospects

PTON has an overall F rating, which equates 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, which is in sync with its negative values for trailing-12-month ROCE, ROTC, and ROTA versus the 7.21%, 7.21%, and 5.78% industry averages.

The stock has an F grade for Value, which is consistent with its higher-than-industry valuation ratios.

Moreover, PTON has an F grade for Growth and Sentiment also. This is in sync with analysts’ expectations that its EPS will remain negative in the current year. Its  EPS is expected to decline at a 255.4% rate  per annum over the next five years.

In addition to the POWR Rating grades we’ve just highlighted, we’ve also rated PTON for Stability and Momentum. Get all the PTON ratings here.

PTON is ranked #70 of 72 stocks in the D-rated Consumer Goods industry.

Bottom Line

PTON witnessed increasing demand for its fitness equipment and services amid the COVID-19 pandemic as people focused on their fitness while spending more time at home. However, the need for its products is declining with people resuming outdoor activities. Moreover, PTON is still caught  in several controversies, and its growth prospects look bleak in the near term. So, we think it could be wise to avoid the stock now.

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

While PTON has an overall POWR Rating of F, one  might want to consider investing in different Consumer Goods stocks with an A (Strong Buy) or B (Buy) rating, such as Société BIC SA (BICEY - Get Rating), Ennis, Inc. (EBF - Get Rating), and The Swatch Group AG (SWGAY - Get Rating).

PTON shares fell $101.48 (-100.00%) in premarket trading Tuesday. Year-to-date, PTON has declined -33.11%, versus a 21.75% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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