shares of Peloton Interactive (PTON -8.80%) were trading as high as $171 in early 2021 but are now trading for under $10. A few years ago, Peloton saw demand for its connected fitness products increase, but the company’s business has been turned on its head as people return to their pre-pandemic routines.
The biggest problem for the company isn’t flagging demand, it’s deteriorating profitability. Peloton reported a massive $2.8 billion in net losses for fiscal 2022 (which ended in June) on sales of just $3.6 billion.
However, you’re probably reading this because you’re aware of a potential opportunity to buy the stock cheaply before the company changes course. After all, Peloton still has a solid brand and a new CEO who previously helped out Netflix through his first decade of growth as chief financial officer.
Here’s what Peloton needs to do to restore investor confidence.
The first thing that should inspire some confidence in Peloton’s future is to make sure it still fills a need in the market. While many people will always prefer a gym to working out at home, Peloton’s 2.96 million Connected Fitness members say there are plenty of potential customers who want a convenient at-home solution. This is good news as Peloton came into being as such the beat the brand to the competition.
The problem for investors is that earnings are still falling. For fiscal 2022, it was down 11%, with the flagging economy putting increasing pressure on the company as revenue fell 28% year over year in the fourth quarter to close out the fiscal year.
Can Peloton stabilize its sales? Yes, but the surge in sales during the pandemic was not a normal demand environment. What’s happening now is a sales correction as business returns to pre-pandemic trends.
When does the correction end? To get an idea of when Peloton’s earnings might stabilize, let’s look at the three-year trend of average monthly workouts per member, which is closely correlated with revenue performance.
In the June-ended fiscal 2020 quarter, at the height of the homestay environment, Peloton’s average monthly workouts per subscriber reached 24.7. With a nasty virus hanging around, buying a Peloton was a popular option to stay in shape at home. Sales doubled that year and the stock went to the moon.
Last quarter, average monthly workouts per subscriber dropped to 14.8. This is closer to pre-pandemic levels in fiscal 2019, when the average monthly workouts were 12. The recent decline in this metric also aligns with falling interest in Peloton Bikes and the resulting decline in sales. It’s possible that interest in Peloton’s products could bottom out if this metric hits 2019 levels, but nothing is guaranteed as consumers are currently tightening their wallets.
In a normal economic environment, investors could expect earnings to stabilize soon, but uncertainty surrounding inflation and consumer spending makes it difficult to predict when earnings will stop falling.
While getting the bottom line back to breakeven is important for Peloton, new CEO Barry McCarthy sees revenue growth as a top priority. “It’s not enough to just cut spending,” he said during August’s fourth-quarter earnings call. “We need to increase sales.”
The fact that the average monthly training per member is 23% higher than three years ago is very encouraging. It indicates that as Peloton continues to expand its content offerings and the number of training courses available on Bike and Tread, members are increasingly using their equipment as part of their regular training schedule.
The idea of increasing engagement and subscriptions by investing in more content came straight from McCarthy’s background, who worked at Netflix from 1999 to 2010. This will be critical to Peloton’s growth strategy.
However, the company’s mounting losses are making it difficult for Peloton to invest in new products and content to attract users. It ended fiscal 2022 with $1.3 billion in cash and cash equivalents, having used $2.4 billion in free cash flow during the year. And Peloton clearly hasn’t found revenue stability yet, leaving management with work to do to bring the business back to profitability.
There is hope for Peloton. It may even become a growth stock again, but the clock is ticking. I wouldn’t accept this as a turnaround game until Peloton shows the bleeding has stopped.
John Ballard has positions at Netflix. The Motley Fool has positions in and recommends Netflix and Peloton Interactive. The Motley Fool has a disclosure policy.