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Peloton Interactive Inc(PTON-Q)

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Peloton Is Down 97%: Is It Time to Buy and Hold this Beaten-Down Stock?

Motley Fool - Wed Feb 14, 7:43AM CST

While the market continues to hit fresh all-time highs, some companies couldn't be struggling more. Peloton Interactive(NASDAQ: PTON) is one such unfortunate business.

The fitness enterprise reported mixed results for its fiscal 2024 second quarter (ended Dec. 31). But investors really weren't pleased with the new info that was revealed, as the consumer discretionary stock fell more than 20% on the day of the announcement.

This means that shares are down 97% from their peak price roughly three years ago. Should you take advantage of this dip to buy and hold the beaten-down stock right now?

Looking at the latest results

Peloton's revenue declined 6% year over year to $743.6 million. This top-line figure exceeded the average Wall Street analyst estimate by about $10 million. The business posted a loss per share of $0.54, which was worse than the consensus expectation.

However, those key numbers weren't exactly what drove the stock price down. Management's guidance was disappointing. It forecast sales of between $700 million and $725 million in the current quarter, well below analyst estimates of $754 million.

Struggling to find what works

Peloton is having problems getting back to growth, and its net losses are still sizable. Investors need to wonder whether the business can expand its user base again.

Last quarter, the company's connected-fitness subscriber count, which includes people who purchased a piece of equipment, rose by 1%. That's respectable, but it's not even close to where Peloton was a few years ago. Even worse, its digital-app subscribers shrunk by 6% quarter over quarter.

These issues demonstrate that the leadership team is struggling to find a strategy that works, which is why they seem to be trying everything.

Barry McCarthy, the CEO who is about two years into his tenure, added Amazon and Dick's Sporting Goods as key retail accounts. He launched a rental program, as well as partnerships with Lululemon and TikTok. While management admits some of these strategies are working better than others, it hasn't done a good enough job at getting the overall business back to growth mode.

One of McCarthy's top initiatives when he took over was to focus on the digital app strategy in order to drive greater high-margin recurring revenue. But even this isn't working according to plan.

Chief financial officer Liz Coddington wrote in the 2024 second-quarter shareholder letter, "Our outlook is tempered by uncertainty surrounding our ability to efficiently grow Paid App subscribers and the performance of other new initiatives, as well as an uncertain macroeconomic outlook."

These comments show that management has minimal visibility for this strategy's success. So, why should shareholders have any confidence that whatever Peloton is doing is the right move?

Missing the mark

It's obvious that the company continues to struggle to find solid footing and get back to growth. Consumers just aren't as interested in what the company offers anymore. The hope is that sales growth can be achieved in the fourth quarter of fiscal 2024. But this target has been pushed back before, so it's anyone's guess if it can happen.

It's the same story when it comes to profitability. McCarthy failed to reach goals in the timeline he set out. Peloton does expect to post positive free cash flow in the fiscal 2024 fourth quarter as well. But again, I wouldn't be surprised if this is another case of overpromising and under-delivering.

To their credit, executives are doing their absolute best to turn things around for what remains a floundering business. But they certainly have their work cut out for them.

Despite the shares getting absolutely hammered in recent years, investors should avoid the stock. This looks like a classic value trap.

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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. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Lululemon Athletica, and Peloton Interactive. The Motley Fool has a disclosure policy.

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