Down More Than 71% In 2022, Should You Buy Peloton Stock?

With more than seven million members, Peloton Interactive Inc. (NASDAQ: PTON) is one of the largest interactive fitness platforms in the world. The company first gained traction during the first wave of the pandemic in March 2020, as the global shutdown of gyms and outdoor fitness centers drove people to opt for indoor alternatives. PTON stock surged more than 400% in 2020, making it one of the most popular Covid-era stocks. 

However, PTON is struggling in a post-Covid world, as the gradual reopening of the economy coupled with increased production costs have caused the company’s profit margins to dwindle lately. The stock is down more than 89% over the past year and 71% year-to-date.  

Widening losses 

Peloton reported lackluster performance in the most recent quarter. Peloton’s operating loss worsened by nearly 300% year-over-year to $1.2 billion in the fiscal fourth quarter (ended June 30). Net loss amounted to $1.24 billion, compared to the $312.20 million net loss reported in the fourth quarter of 2021. 

The company’s total revenues in the fiscal 2022 fourth quarter totaled $678.70 million, missing the Bloomberg consensus estimate of $685.90 million. Also, total revenues declined 28% year-over-year from the fiscal 2021 fourth quarter due to a 55% year-over-year decline in Connected Fitness Products revenue. 

Breakthrough Amazon deal and production restructuring

Peloton’s CEO Barry McCarthy has attributed the weak quarterly performance to restructuring costs. He stated, “We reported an operating loss of $1.20 billion in Q4. $415 million of the loss was related to restructuring charges. The loss reflects the substantial progress we made this last quarter re-architecting the business to reduce the current and future inventory overhang, converting fixed to variable costs, and addressing numerous supply chain issues.”

Peloton’s new CEO has made several operational changes since his appointment in February. His latest move was to strike up a deal with e-commerce giant, Inc. (NASDAQ: AMZN) to sell Peloton Bikes and Guide through the e-commerce website as well as retail stores across the country. 

Another major move is that McCarthy planned to stop producing domestically. Earlier last month, the company stated in a press release that it is working toward expanding its outsourcing contract with Taiwan-based Rexon Industrial for manufacturing its signature bikes and treadmills. 

While analysts expect the company to save millions in the long term, the unwinding costs in the short term are significant. Also, Taiwan’s regional stability amid increasing threats from China is in question. In fact, Peloton delayed its annual financial filing with the SEC primarily to complete an accurate calculation of impairment costs. 

Q1 expectations for PTON stock

Though McCarthy stated that its fiscal fourth losses reflect “significant progress driving our comeback and Peloton's long-term resilience,” he expects fiscal 2023 to remain challenging. The connected fitness market in the U.S. has declined by approximately 51% so far this year, while Peloton lost nearly 17% market share in 2022. 

PTON expects its revenues to range between $625-$650 million in the current quarter, indicating a 6% decline sequentially. Management attributes this estimated decline to increased hardware prices and a decline in seasonal demand. Adjusted EBITDA loss is expected to come in between $90-$115 million.

Bottom line 

It’s safe to conclude that PTON’s near-term prospects look far from positive. With weak market demand amid slumping consumer spending and substantial restructuring costs, it is hard to estimate when PTON will retain profitability.