New York City-based exercise bike and treadmill maker Peloton Interactive, Inc. (PTON) recently announced its first connected strength product, Peloton Guide. However, the company also cut its annual revenue forecast by $1 billion and lowered its subscriber growth and profit margin projections. Moreover, Argus Research has downgraded the stock from a ‘Buy’ rating to a ‘Hold’ rating, citing a higher expectation of losses over the rest of PTON’s fiscal year 2022.

The stock has declined 51.9% in price over the past month and 56.6% over the past three months to close yesterday’s trading session at $44. In addition, it is currently trading 74.3% below its all-time high of $171.09, which it hit on January 14, 2021. Furthermore, intensifying competition and reopening gyms pose a severe risk to the company’s market position. So, we think PTON’s near-term prospects look bleak.

Here is what could influence PTON’s performance in the coming months:

Top Line Growth Doesn’t Translate into Bottom Line Improvement

For its fiscal third quarter, ended September 30, 2021, PTON’s revenue surged 6.2% year-over-year to $805.20 million. However, its gross profit for the quarter decreased 20.1% year-over-year to $262.70 million, while its net loss came in at $376 million, compared to $69.30 million in income in the prior-year period. Also, its loss per share was $1.25, compared to an EPS of $0.20 in the year-ago period.

Selling Shares

On November 16, PTON announced that it had commenced an underwritten public offering of $1 billion of shares of its Class A common stock. In addition, it is expected to grant the underwriters of the offering a 30-day option to purchase up to an additional $150 million of Class A common stock at the public offering price. PTON intends to use the net proceeds from the offering for general corporate purposes. However, the offering dilutes the ROE for existing shareholders.

Ongoing Investigations

Several law firms are investigating potential claims against PTON regarding whether the company and certain of its officers and/or directors have engaged in securities fraud or other unlawful business practices. It is alleged that the company falsely assured investors that its positive results and growth would continue after the pandemic. In addition, it allegedly made false and misleading statements about the amount of inventory it held.

Stretched Valuation

In terms of forward EV/S, PTON’s 3.37x is 131.5% higher than the 1.46x industry average. Likewise, its 3.19x forward P/S is 176.4% higher than the 1.15x industry average. And the  stock’s 11.97x forward P/B is 246% higher than the 3.46x industry average.

Low Profitability

In terms of trailing-12-month gross profit margin, PTON’s 34.06% is lower than the 35.675 industry average. And its 1.03% trailing-12-month asset turnover ratio is lower than the 1.05% industry average. Furthermore, the stock’s trailing-12-month ROCE, ROTC, and ROTA are negative versus the 17.28%, 7.81%, and 6.09% industry averages.

Unfavorable Analyst Estimates

Analysts expect PTON’s EPS to decrease 805.6% in the current quarter, 633.3% next quarter, and 850% the current year. Also, its EPS is expected to remain negative in the current quarter, next quarter, current year, and next year.

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 accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. PTON has an F grade for Quality, which is in sync with its negative ROE, ROTC, and ROA.

PTON also has an F grade for Growth and Sentiment. This is justified because analysts expect its EPS to decline in the near term.

The stock has a D grade for Value, consistent with its higher-than-industry valuation ratios.

PTON is ranked #70 of 71 stocks in the D-rated Consumer Goods industry. Click here to access PTON’s ratings for Stability as well.

Bottom Line

PTON is currently trading below its 50-day and 200-day moving averages of $76.48 and $102.30, respectively, indicating a downtrend. Moreover, it could continue losing in the near term due to concerns over increased input prices and higher freight costs. Because the stock looks overvalued at the current price level, we think it is best avoided now.

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

While PTON has an overall POWR Rating of F, one might want to consider investing in the following Consumer Goods stocks with an A (Strong Buy) or B (Buy) rating: Mannatech, Incorporated (MTEX), Société BIC SA (BICEY), and Ennis, Inc. (EBF).

PTON shares were trading at $43.78 per share on Wednesday afternoon, down $0.22 (-0.50%). Year-to-date, PTON has declined -71.14%, versus a 23.83% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...

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