PTON Quick Quote PTON - Free Report) , a leading digitally-inspired exercise equipment company, was provided with one of the most favorable tailwinds it could have asked for amid last year's pandemic lockdowns. With gyms closed, cold weather keeping society inside, and individual consumption turning towards durable (with services nowhere to be found), Peloton's high-end in-home digital bike and other connected equipment saw a tidal wave of unforeseen demand.
PTON was catapulted an incredible 733% in less than a year to its January high of $171. The stock has since fallen out of market favor as investors & traders began to realize that the 'profitable' growth it experienced during the pandemic was unsustainable. PTON has lost 46% of its value in the past 8.5 months, and I still see further downside from here.
COVID pulled forward immense demand, which temporarily propelled this consumer discretionary business into profitability for the final three quarters of 2020. This prolific demand ramp-up drove management to swiftly scale its operations for growing sales volume from here on out. Unfortunately, Peloton seems to have overextended itself, with this most recent June quarter results (fiscal Q4) exposing its worst gross margins and net quarterly losses as a public company.
Aggressive Value Degrading Strategy
Peloton's management team recently cut the price of its connected bikes (best-selling product) by 20% and increased its marketing spending. This audacious move had investors and shareholders running for the hills since its fiscal Q4 earnings release at the end of August (8/26), with PTON having lost nearly 20% of its value in the past month.
Demand for Peloton's luxury bikes is falling off a cliff, and management is taking desperate margin-crushing measures in a feeble attempt to reverse this trend. This bold management team is sacrificing profitability in the coming years for long-term brand recognition and subscription-based growth attached to its products.
This is a precarious move for a public enterprise once teetering on profitability. After assessing Peloton's deteriorating balance sheet, the price drop and marketing spend increase look downright reckless, especially in our current inflationary environment. Investors want to see sustained profitability and a proven management team before this kind of aggressive topline expansion strategy is put into place.
Analysts have been dropping long & short-term EPS estimates to the core of the Earth. Zacks Consensus Estimates had Peloton on a maintained profitable growth trajectory as soon as this year, as recent as a month ago. Now, after some brash moves by this management team led by prior Barnes & Noble exec John Foley combined with decelerating post-pandemic demand, Peloton's profitability timeline has been pushed out to 2024, driving its stock down to a Zacks Rank #5 (Strong Sell).
I am seeing analysts cut price targets across the board, with one analyst seeing a fair value of $45 a share, less than half of the generous $93 PTON is currently trading at today.
Peloton is still being valued like a high-growth tech, despite its nearly 50% price drop since its January highs. In reality, it is nothing more than an exercise equipment company operating in a highly saturated space with low barriers to entry. When you Google "Peloton Competitors," you get a slew of options, with the top two articles being "6 best Peloton alternatives for 2021" and "The 8 Best Peloton Bike Alternatives of 2021."
There are too many competitors of this durable one-time purchase for me to consider this stock investible, especially after considering its plummeting margins, diminishing cash balance, and accumulating debt while trading at a 5x P/S, with profitability nowhere in sight.