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Can Peloton Stock Really Make an 'Epic Comeback?'

Motley Fool - Sun Feb 5, 4:15AM CST

Has Peloton Interactive(NASDAQ: PTON)finally reset itself? The connected fitness superstar exploded well beyond its capabilities at the beginning of the pandemic and then seemed to implode as it made strategic moves that failed to anticipate consumer demand. It's been a year since the company brought in a new and experienced CEO to get back on track, and Peloton looks a lot different than in the heady days of lockdowns.

In the 2023 second-quarter recent report, CEO Barry McCarthy said, "If you've been wondering whether or not Peloton can make an epic comeback, this quarter's results show the changes we're making are working." Peloton is demonstrating progress. But can it make this "epic comeback?"

How Peloton is trying to come back

Peloton's problems started because it grew too quickly to meet demand, and then it was left with a huge inventory of expensive stationary bikes and treadmills, as well as factories and warehouses, as demand curtailed when gyms reopened. That's been exacerbated by inflation as costs are rising and people are cutting back on luxury goods.

Founder and CEO John Foley left last year, and McCarthy, a Netflix and Spotify veteran, took over. McCarthy set three initial goals: stabilize cash flow, get the right team, and power sales growth.

Over the past 12 months, McCarthy has done a lot of work toward reaching these goals. He revamped the management team; is working on selling a domestic factory; cut employee headcount by more than half; restructured operations, delivery systems, and customer service; expanded with new products and live classes; and more.

There were several changes of note. Peloton cut its inventory by more than $500 million year over year. That's an important step in becoming financially efficient. It also began to offer sales through third-party vendors, Amazon and Dick's Sporting Goods, moving on from only direct sales. Finally, it made headway in becoming cash-positive, reducing its negative cash flow from nearly $750 million in last year's second quarter to $94 million this year. McCarthy said that without some one-time outflows to cover parts it no longer needs, it would have been $8 million cash-flow positive.

How that's playing out right now

Second-quarter performance demonstrated the impact of some of these changes as well as the pressured circumstances in which Peloton finds itself right now.

Revenue declined 30% year over year, and membership was about flat, although connected fitness subscriptions increased 10%. McCarthy and his team are focused on the subscription numbers, which have high gross margins relative to hardware. Peloton has calculated that the expenses it lays out to capture new members result in a high lifetime value for the company, and investors should expect increased pressure on profits in this stage, which management expects to benefit the company later on.

What to expect in 2023

Peloton laid out its objectives for this year, which include returning to sales growth and at least breaking even with cash flow. It's continuing with most of the initiatives and objectives it worked on last year and will increasingly focus on subscriptions instead of hardware to increase sales and improve its free cash flow.

Management intended to sell Precor, the commercial equipment brand it bought in 2020, but since it's not getting the price it thinks it's worth, it's going to invest in that business instead. That will tack on to its already high expenses, and it's more short-term pressure for what management sees as long-term gain.

Skip this cheap stock for now

I have to admit I'm impressed with McCarthy and what he has done so far for Peloton. I anticipate further success with the improvements he's making, and I do think he can help it make a comeback.

At the same time, I don't see any reason to take a chance on Peloton stock right now. It's too risky for most investors. Shares seem cheap, trading at around 1.6 times trailing-12-month sales. But you can buy much more secure stocks and still see your money grow.

Don't be worried about missing out on a great deal. Your best chance at successful investing is finding great companies that can grow.

It would be fitting here to mention Warren Buffett's nugget that he'd rather buy a great company at a fair price than a fair company at a great price. For the time being, Peloton is in the latter category. When it becomes a great company, investors can consider adding it to their portfolios.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends, Netflix, Peloton Interactive, and Spotify Technology. The Motley Fool has a disclosure policy.

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