Peloton Interactive Inc. (PTON) provides an interactive fitness platform and sells interactive fitness products in North America and internationally. The company operates through two segments: Connected Fitness Products and Subscriptions. 

On February 1, 2023, PTON’s release of fiscal 2023 second quarter results coincided with CEO Barry Mc Carthy’s first anniversary at the fitness equipment company, covering a year that was mostly spent executing an aggressive turnaround strategy.

Over the past year, the company restructured its operations by shedding off more than half of its headcount (from 9k to nearly 4k). As a result, the company outsourced the manufacturing of its Connected Fitness Units (CFUs) as well as its last-mile delivery.

Moreover, PTON expanded its offerings by launching Row and Guide and related content, Fitness as a Service (FaaS), and Peloton Certified Refurbished. The company also launched third-party sales through Amazon.com, Inc. (AMZN) and Dick’s Sporting Goods Inc. (DKS) while restoring and expanding live Studio classes in NY and London.

PTON’s fiscal 2023 second-quarter revenue came in at $792.7 million, exceeding Wall Street’s estimate of $710 million and the company’s expected range of $700 to $725 million. This outperformance was driven by a 9.6% year-over-year increase in connected fitness subscriptions from 2.77 million to 3.03 million.

During the quarter, PTON’s revenue from Connected Fitness Products decreased 52.1% year-over-year to $381.4 million, while Subscription revenue increased 21.9% year-over-year to $411.3 million. Since the company lost money on Connected Fitness Products, with a gross margin of negative 11.2%, and made money on Subscriptions, with a gross margin of 67.6%, PTON’s total gross margin increased 490 bps above the previous-year value to 29.7%.

With the company generating positive free cash flow (FCF) of $8 million, albeit with the exclusion of settlement obligations, and reporting its narrowest loss since the fiscal 2021 fourth quarter, investors’ optimism got reflected in the stock price action. Despite plummeting 57.1% over the past year, the stock has gained 18.8% over the past month.

Let’s see whether PTON’s fundamentals look strong enough to justify investors’ increased expectations.

Financials Have Enough Room for Improvement

Despite exceeding expectations, PTON revenue during the fiscal 2022 second quarter decreased 30.1% year-over-year to $792.7 million. The company’s total gross profit also decreased 16.4% year-over-year to $235 million.

Moreover, despite its net loss narrowing significantly from $439.4 million or $1.39 per share during the previous-year quarter to $335.4 million or $0.98 per share, it’s the eighth quarter in a row the exercise company has reported losses.

Poor Profitability

PTON’s track record of consistent losses has also been reflected in its profitability metrics. It has a trailing 12-month gross profit margin of negative 20%, compared to the industry average of 35.33%. Its trailing 12-month EBITDA and net income margins of negative 36.32% and negative 90.31% also stand out in stark contrast to the industry averages of 11.09% and 4.80%, respectively.

Moreover, in terms of the trailing 12-month ROCE, ROTC, and ROTA, PTON significantly underperforms relative to the industry averages of 12.47%, 6.37%, and 4.31%, respectively.

Discouraging Analyst Estimates

Analysts expect PTON’s revenue for the fiscal 2023 third quarter to decrease 26.4% year-over-year to $710.03 million. For the entire fiscal, the company’s revenue is expected to decrease 23.3% year-over-year to $2.75 billion, while it is expected to incur a loss of $2.55 per share. Moreover, profitability is expected to elude the company over the next two fiscals.

Stretched Valuation

The stock’s recent uptick in demand has elevated it to a frothy valuation that the business might find challenging to justify and sustain.

PTON’s forward EV/Sales multiple of 2.29 is 86.11% above the industry average of 1.23. Similarly, its forward Price/Sales multiple of 1.73 exceeds the industry average of 0.96 by 79.7%.

Moreover, the stock’s trailing-12-month Price/Book multiple of 155.34 stands out in stark contrast to the industry average of 2.35.

POWR Ratings Reflect Weakness

PTON has an overall F rating, which equates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated 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 also has an F grade for Stability, as reflected in its beta of 1.97 and the vast spread between its 52-week high and low prices of $32.14 and $6.66, respectively. Moreover, it also has an F grade for Sentiment, consistent with bleak analyst estimates.

PTON has a D grade for Value and Quality, in sync with its stretched valuation and weak profitability. Unsurprisingly, it is ranked #55 of 58 stocks in the Consumer Goods industry.

Beyond what has been discussed above, additional ratings for Growth and Momentum of PTON can be found here.

Bottom Line

PTON’s key differentiator has been its Connected Fitness Products. However, negative margins and declining sales in the segment also threaten to take the wind out of the sails of its lucrative Subscription services. Moreover, with the manufacturing outsourced, a dilution of user experience and band value poses the risk of dwarfing any operational gains made by the company.

Secondly, PTON’s decision to raise $750 million in bank debt during the past year may backfire on the business amid progressively increasing borrowing costs due to interest-rate hikes by the Federal Reserve.

Lastly, despite the upbeat management commentary and investor sentiment, the company registered 852,000 subscribers to its app, a 1% drop compared with the year-ago period. This trend of decreasing subscriber count might continue to gather momentum with consumers’ reversal to a hybrid lifestyle after the pandemic. This might put the company’s turnaround plans in jeopardy.

In view of its weak fundamentals and an increasingly uphill path to profitability, it may be wise to avoid buying the stock until its prospects become clearer.

How does Peloton Interactive, Inc. (PTON) Stack up Against Its Peers?

PTON has an overall POWR Rating of F, which equates to a Strong Sell. Hence, you might consider looking at its Consumer Goods industry peers, Kimberly-Clark de México, S. A. B. de C. V. (KCDMY), and Ennis, Inc. (EBF), with an A (Strong Buy) rating.

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PTON shares were trading at $13.47 per share on Friday afternoon, down $0.28 (-2.04%). Year-to-date, PTON has gained 69.65%, versus a 5.99% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...

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