Bear Of The Day: Peloton (PTON)
Peloton is nothing more than an exercise equipment company, operating in a highly saturated space with low barriers to entry
Peloton PTON, a digitally-powered exercise bike 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 at-home digital bike and other connected equipment were the perfect exercise toys for this environment.
COVID pulled forward an immense amount of demand which temporarily propelled this consumer discretionary business into profitability for the finally three quarters of 2020. This prolific demand ramp-up drove management to swiftly increase capacity for growing sales volume from here on out. Unfortunately, Peloton seems to have overextended itself, with its June quarter (fiscal Q4) demonstrating its worst gross margins and net quarterly losses as a public company.
Aggressive Value Degrading Strategy
Peloton's management team is cutting the price of its connected bikes (best-selling product) by 20% and increasing its spending on marketing. This move had investors and shareholders running for the hills since its fiscal Q4 earnings release last Thursday evening, with PTON having lost over 12% of its value since. This 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 an unprofitable business with a deteriorating balance sheet. 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 EPS estimates to the core of the Earth. Zacks Consensus Estimates had Peloton on a profitable growth trajectory as soon as its December quarter. Now it has been pushed out to 2024, driving PTON 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 $100 PTON is currently trading at today.
Peloton 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 5.5x P/S, with profitability nowhere in sight.
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Peloton Interactive, Inc. (PTON): Free Stock Analysis Report
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