Here’s Why Peloton Stock Is NOT A Buy Right Now

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To understand how fickle the stock market is, you only need to look at Peloton stock. The company was a pandemic darling with its products like Peloton Bike, Peloton Bike+, Peloton Tread, and Peloton Tread+. Everyone was locked up in their homes, and working out from home was the only possible option for maintaining health and fitness.  

Hashtag Investing has written about Peloton regularly. The last time we wrote about Peloton stock was in June 2022, after it released its third-quarter financials for FY2022. In that article, we cautioned investors against investing in the stock – we said, “Therefore, until any positive changes are witnessed, it might be a little risky to put money on the Peloton stock.” Today, we can safely say that there are no positive changes in the company and you should avoid them.

Operating across North America and internationally until the second quarter of this year, the company still has close to 7 million fitness enthusiasts. They use Peloton’s internet-connected stationary bicycles and treadmills which lets them remotely participate in classes via streaming media as per their monthly subscriptions.

However, the situation of the stock at present seems quite grim. Peloton has lost close to 92% of its valuation in the past year and about 70% in the past six months. Considering the present bear market condition and the fact that a recession might be around the corner anytime soon, it is prudent to stay away from stocks that are poised to fall.

Unable to Predict Demand Correctly 

Any organization that wants to grow needs to predict Demand accurately. Companies must properly assess how much of their product or service will be required by customers and produce inventory accordingly. If not, it will lead to over-piling of merchandise in case of overproduction or missed selling opportunities in the case of underproduction. Such circumstances are usually disastrous for any organization’s growth as it eats up its entire working capital and hinders the organization from directing its resources in the areas where it is most needed. Peloton could have done better at predicting Demand.

The company badly interpreted the market demand and overproduced fitness equipment. During the pandemic, Demand for home fitness and home fitness equipment like indoor cycling bikes, kettlebells, Elliptical cross Lcd, etc., surged through the roof. Peloton assumed the good times (for it) would never end.

However, as the pandemic-related restrictions started easing out and people started returning to their gyms, Demand for home fitness equipment plummeted. So, as Peloton had over-produced, expecting people to continue to buy its equipment, it experienced a massive bottom-line blowout.

Contraction in Demand for Offerings

The company had to halt the production of its Exercise Bikes and treadmills earlier this year owing to this reduced demand situation. Moreover, it was forced to stop manufacturing its Bikes and Tread lines and outsource the same to a Taiwanese manufacturer called Rexon Industrial Corp.

Such a decision was implemented after the company lost as much as $2.8 billion during the quarter that ended on 30th June 2022. This was majorly due to a dip in sales. Further, the company’s average monthly workouts per subscriber decreased by 43% from its pandemic-era high point. Notably, all these have happened even though Peloton was expecting revenue growth in the next three months.

In the near term, it might be more challenging for Peloton to increase its Demand exponentially than during the pandemic. This is because the current social environment is entirely different from what it used to be back in 2020. People are moving outdoors easily, and gyms in all areas have also reopened. Therefore, the requirement to work out indoors has reduced significantly, and so has people’s interest in Peloton’s products. Additionally, due to high inflation levels, the economic climate around the world is also weak. The Fed has constantly been raising interest rates, making it difficult for people to spend thousands of dollars on exercise equipment.

Although Peloton has recently launched a new rowing machine to aid customers’ home workout programs, considering the ongoing market crisis and the fact that the tool costs $3,195, it might make little difference to the company’s present condition.

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Generating Losses

The latest financials of Peloton weren’t much better. Especially its fourth quarter report for the quarter ended 30th June 2022 depicted serious issues like declining revenue, negative gross margin, and more profound operating losses. All these are enough to threaten the viability of any business.

Peloton’s average negative free cash flow for the past six months was as high as $650 million, although, by the last quarter, the outflow had reduced a bit to $412 million. The company expects it might break even by the second half of FY23 and is striving to achieve that. Even though it is heavily investing in marketing and innovation, it has yet to lead to an increase in its sales volume. Instead, it had to witness a quarterly operating loss of $1.2 billion, with $415 million worth of the loss solely relating to restructuring operations. 

Yes, Peloton is indeed taking measures to do away with the losses. For instance, it has recently entered into a partnership with Amazon to sell its equipment and accessories on Amazon’s e-commerce portal. The search queries are pretty promising, too, as it states consumers have searched for Peloton about 500,000 times per month. Besides this, Peloton’s products are also available in Dick’s Sporting Goods, and with this opportunity, the company’s products will be able to compete even better with its largest competitors. Its move relating to the experimentation with the subscription-based pricing model can lessen the up-front cost for potential customers, thereby driving the Demand for its services.

These restructuring measures might bring satisfactory results in the upcoming times, but it will take a lot of work for Peloton. With only $1.2 billion worth of cash and equivalents left on its balance sheet, a similar loss will be difficult for the company to absorb, and its breakeven phase also still seems quite far.

Peloton was once one of the market’s most appealing buys. However, the market is currently unsatisfied with the company’s performance and prospects. The fact that the company was forced to close its factory plans and engage in several layoffs did not sit well with investors. So, even though the stock is trading near its 52-week low and is extremely cheap, it is still best to avoid it entirely.

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