Peloton Interactive, Inc. (PTON) provides a connected, technology-enabled interactive fitness platform. The company offers services like instructor-led boutique classes for its customers. Also, its product portfolio includes Peloton Bike, Peloton Bike+, Tread and Tread+, bike mat, heart rate monitor, and dumbbells.

PTON was one of the biggest gainers during the severity of the COVID-19 pandemic, as people were confined within the walls of their homes, and the demand for home fitness equipment skyrocketed. Its subscribers grew from 700,000 to nearly 3 million during that period. However, the company’s sales declined over the past year.

With recession fears looming, PTON is expected to remain under pressure as consumer spending is expected to take a hit. Amid a recession, people are less likely to spend on discretionary items like home fitness equipment.

On May 10, 2022, PTON CEO and President Barry McCarthy said that the company signed a binding commitment letter with JP Morgan and Goldman Sachs to borrow $750 million in 5-year term debt as it was thinly capitalized.

Morgan Stanley analyst Lauren Schenk expects PTON’s subscriptions for the fourth quarter to be at their lowest level since before the pandemic.

Schenk wrote in her research note, “While net adds look better than feared, we remain cautious on the stock as we expect the initial guide could come in below the Street given current trends, a weaker macro backdrop, and also a new CFO that may want to start the new fiscal year with a healthy dose of conservatism.”

The stock has declined 75% in price year-to-date and 92.4% over the past year to close the last trading session at $8.92. It is currently trading 93% below its 52-week high of $127.57, which it hit on July 20, 2021.

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

Disappointing Financials

PTON’s total revenue declined 24% year-over-year to $964.30 million for the third quarter ended March 31, 2022. The company’s operating expenses increased 101% year-over-year to $920 million.

Its net loss widened 8,704% year-over-year to $757.10 million. In addition, its adjusted EBITDA loss came in at $194 million, compared to the adjusted EBITDA of $63.20 million in the year-ago period.

Unfavorable Analyst Estimates

Analysts expect PTON’s EPS to remain negative in fiscal 2022 and fiscal 2023. Its revenue for fiscal 2022 is expected to decline 10.8% year-over-year to $3.59 billion. Its EPS is expected to decline 26.9% per annum over the next five years.

Lower-than-industry Profitability

PTON’s trailing-12-month net income margin is negative compared to the 6.56% industry average. Likewise, its trailing-12-month EBIT margin is negative compared to the 8.92% industry average. Furthermore, the stock’s 0.84% trailing-12-month asset turnover ratio is 17.7% lower than the industry average of 1.02%.

POWR Ratings Reflect Bleak Prospects

PTON’s overall F rating equates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 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, in sync with its negative trailing-12-month levered FCF margin compared to the 3.25% industry average.

It has an F grade for Stability, consistent with its 1.48 beta. Furthermore, the unfavorable analyst estimates justify the F grade for Sentiment.

PTON is ranked #59 out of 60 stocks in the Consumer Goods industry. Click here to access PTON’s Growth, Value, and Momentum ratings.

Bottom Line

PTON’s cash and cash equivalents are dwindling amid falling consumer demand and declining consumer sentiment. PTON faces a cash flow crunch due to its inventory pileup amidst softening sales. The company borrowed $750 million to meet its cash flow requirements.

PTON expects its subscribers to decline with its price hikes. Moreover, given its poor financials, unfavorable analyst estimates, and lower-than-industry profitability, the stock is best avoided now.

How Does Peloton Interactive, Inc. (PTON) Stack Up Against Its Peers?

PTON has an overall POWR Rating of F, equating to a Strong Sell rating. Therefore, one might want to consider investing in other Consumer Goods stocks with an A (Strong Buy) or B (Buy) rating, such as Mannatech, Incorporated (MTEX), Ennis, Inc. (EBF), and Pandora A/S (PANDY).

PTON shares were trading at $9.27 per share on Tuesday morning, up $0.35 (+3.92%). Year-to-date, PTON has declined -74.08%, versus a -18.48% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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