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Peloton Interactive Inc(PTON-Q)

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Can This Beaten-Down Stock Skyrocket More Than the "Magnificent Seven" Over the Next 5 Years?

Motley Fool - Fri Feb 23, 8:45AM CST

In the years since its business boomed during the social-distancing phases of the pandemic, Peloton Interactive(NASDAQ: PTON) has been dealing with ongoing challenges, and it's trying to get back to its winning ways. A new leadership team is implementing changes to get the struggling company on a path to achieving growth and financial soundness.

Shareholders have been feeling the pain. As of this writing, the consumer discretionary stock is 97% below the peak price it reached in January 2021. Maybe there's upside for patient investors. But does beaten-down Peloton have a shot to grow by more than the "Magnificent Seven" stocks over the next five years?

New and clear objectives

In its fiscal 2024 second quarter, which ended Dec. 31, Peloton reported a sales drop of 6%. That continued a streak of shrinking revenue. It should come as no surprise, then, that the executive team is trying urgently to get the company back to growth. Management is attempting a bunch of different things to spur demand, including stationary bike rentals, retail partnerships, an upgraded digital app, and content partnerships.

The company posted a net loss of $195 million in fiscal Q2. While this was a huge improvement from the year-ago period, Peloton still has a lot of work to do to get to profitability. It doesn't help that we are in uncertain economic times.

I can see why investors might be intrigued to dip their toes in the Peloton waters. The stock trades at a bargain-basement price-to-sales ratio of under 0.6 -- about as low a valuation as the shares have ever had. Expectations for the business are evidently extremely low.

But if Peloton can start to make some serious progress and generate a touch of optimism about the business, there's room for the valuation multiple to rise from that ridiculously cheap level. This is what bullish investors are hoping for.

Magnificent for a reason

However, to think that Peloton can outpace the Magnificent Seven stocks between now and 2029 is totally unreasonable. For one, a lot of things will need to go right for this struggling company just to get it back to pedaling in the right direction. To quote the enduring wisdom of Warren Buffett: "Turnarounds seldom turn."

And the Magnificent Seven are some of the most dominant enterprises on the face of the planet. Peloton shouldn't even be mentioned in the same breath as these companies.

With the iPhone, Apple has one of the most financially successful products in the world. Microsoft sells mission-critical productivity software, with nearly every business out there among its customers. Alphabet and Meta Platforms own the most popular internet services. Google Search, YouTube, Facebook, and Instagram not only generate insane amounts of digital ad revenue, but they benefit from powerful network effects.

As a global leader in electric vehicles, Tesla completely disrupted the auto industry. Nvidia provides the cutting-edge chips that power data functions, making it a valuable artificial intelligence infrastructure play. And Amazon stands out because it has its hand its numerous different industries, from e-commerce and digital advertising to cloud computing and streaming entertainment.

To think that Peloton will prove a better investment in the next five years than these revolutionary companies is foolish. If we look to the future, there's a real possibility that the exercise equipment business won't even exist. It needs to get on a sustainable financial path sooner rather than later, which is far from a certain outcome.

Investors hoping that Peloton's shares could skyrocket by more than the largest tech giants need to think again.

Should you invest $1,000 in Peloton Interactive right now?

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. 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 Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Peloton Interactive, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

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