Exercise equipment and fitness platform provider Peloton Interactive, Inc. (PTON) is known for its connected fitness products, such as the Peloton Bike and the Peloton Treadmill, as well as on-demand fitness classes. With a loyal community of more than 5.4 million members, PTON’s stock was one of the top performers amid the pandemic last year.

Although robust investments in content and software features and strong connected-fitness-subscription membership growth have helped its stock gain 72.7% in price over the past year, the stock is down 23.2% over the past six months, and closed yesterday’s trading session at $120.93, 29.3% below its 52-week high of $171.09.

With people returning to gyms now that 70% of U.S. adults have had at least one shot of COVID-19 vaccine, the demand for at-home fitness equipment and services is expected to decline. This could be challenging  for the home fitness operator’s business. Furthermore, PTON’s sky-high valuation and ongoing class-action lawsuits could create pessimistic sentiment toward  the stock.

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

Ongoing Investigations and Lawsuits

In June, Johnson Fistel, LLP started investigating potential claims against certain officers and directors of PTON for materially false and misleading statements. Also, Jakubowitz Law, Pomerantz LLP, and Levi & Korsinsky LLP have filed securities fraud class-action lawsuits against the company on behalf of its shareholders. Furthermore, the Schall Law Firm has announced a class action lawsuit against PTON for violations of the Securities Exchange Act of 1934 on behalf of the company’s shareholders.

Waning At-home Workout Trend

With more than 50% of the U.S. population fully vaccinated and 70% of the adults having at least one shot, more states have lifted their mandated coronavirus restrictions on gyms and fitness centers. While at-home fitness activities exploded amid the pandemic, they have been witnessing a sharp decline now that gyms are reopening and visits are rebounding at a fast pace. Online searches for “gym near me” increased in May relative to April, according to boutique investment bank Jefferies. The deceleration in traffic to digital workout platforms could negatively impact PTON’s business in the coming months.

Unstable Financials

Although PTON’s total revenue for the third quarter, ended March 31, 2021, increased 141% year-over-year to $1.26 billion, its Connected Fitness segment’s gross margin stood at 28.4%, representing a 15.93% decline from its  year-ago value. The company’s total operating expenses rose 51% from their year-ago value to $458.67 million, due primarily to accelerated spending associated with acquisition-related hiring and increased investments in new software features. Its net loss was  $8.6 million, while its loss per share stood at $0.03 during this quarter. Also, PTON reported a $13.7 million loss from operations and a $11.2 million comprehensive loss over this period.

Premium Valuation

PTON’s stock is highly overvalued at its current price level. In terms of non-GAAP forward P/E, PTON is currently trading at 701.59x, which is significantly higher than the 16.19x industry average. In addition, the stock’s 144.05 forward EV/EBITDA ratio is 1,203.48% higher than the 11.05 industry average. Also, its  3.04x non-GAAP forward PEG  is 169.2% higher than the 1.13x industry average.

PTON’s forward Price/Sales and Price/Book multiples of 8.88 and 18.75, respectively, compare with the 1.28 and 3.70 industry averages.

Unfavorable POWR Ratings

PTON has an overall D rating, which translates to 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 an F grade for Stability, indicating that the stock is more volatile compared to its peers.

Also, it has an F grade for Value, which is consistent with its higher-than-industry valuation multiples.

In terms of Growth, PTON has a D grade. This is in sync with its weak financials and reflects the company’s weak growth prospects.

In addition to the grades we’ve highlighted, one can check out additional PTON ratings for Sentiment, Quality, and Momentum here.

PTON is ranked #66 of 73 stocks in the D-rated Consumer Goods industry.

There are several top-rated stocks in the same industry. Click here to view them.

Bottom Line

Even though PTON’s strong paid digital subscriptions growth and recurring revenue driven by strong demand for its Connected Fitness Products have attracted investors, its ongoing lawsuits and stretched valuation make it a highly speculative investment. In addition to that, as the interest in at-home workouts fades with more people returning to the gyms, PTON’s business could face challenges. So, we think it’s wise to avoid the stock now.

PTON shares fell $0.93 (-0.77%) in premarket trading Thursday. Year-to-date, PTON has declined -20.29%, versus a 18.18% 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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