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Peloton Interactive Inc(PTON-Q)

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Why Peloton Stock Dropped 19% in February

Motley Fool - Thu Mar 7, 9:02AM CST

Shares of connected fitness giant Peloton Interactive(NASDAQ: PTON) fell 19% in February, according to data provided by S&P Global Market Intelligence. The company reported its fiscal second-quarter results, and investors weren't too happy about them.

The news is getting worse instead of better

It's hard to believe that not too long ago, Peloton was riding high as a pandemic-era darling. Sales were soaring, and demand was so high the company couldn't meet it.

But that came crashing down quickly. Part of the problem was that the company itself made some mistakes, such as building out more than necessary. Part of it was the dramatic decline in demand when lockdowns ended. Altogether, sales have been decreasing, losses are mounting, and there aren't any simple solutions.

Peloton brought in a new CEO two years ago, and he's trying to cut costs and generate demand through a variety of innovations and partnerships. Some of it is bearing fruit; gross margin has been improving, expanding from 29.7% last year to 40.3% this year in the 2024 second quarter. Management expected to generate positive free cash flow in 2024, and although it gave an update that it won't be positive for the full year, it's still expecting positive free cash flow for the fourth quarter.

Peloton moved from being an exclusively direct-to-consumer company to striking up deals with Dick's Sporting Goods and Amazon, and unit growth from these third-party channels increased 74% year over year in the second quarter. Bike rentals have also been a standout, and it's expecting rental revenue to double in 2024. Peloton is also feeling momentum in its collaboration with Lululemon Athletica.

None of that has been enough to turn around the company, though. Members declined 4% from last year in the second quarter, and paid subscriptions were down 16%. Revenue declined 6% from last year, and net loss was $195 million, although that was an improvement from $335 million in 2023.

Is there any hope left for Peloton stock?

There's always hope, but it will continue to be an uphill climb. Peloton has been fielding offers for buyouts, and that's one possible solution to its troubles. There is always the chance that things will turn around, but efficiency enhancements can only do so much; the demand has to be there for the business to survive.

Buying Peloton stock right now looks too risky for most investors. But turnarounds do happen, so keep following the story.

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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 Amazon, Lululemon Athletica, and Peloton Interactive. The Motley Fool has a disclosure policy.

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