Peloton Interactive(NASDAQ: PTON) was one of the market's favorite growth stocks during the pandemic. The maker of connected exercise bikes and treadmills flourished as brick-and-mortar gyms closed down, and that growth spurt coincided with the buying frenzy in growth and meme stocks throughout 2020 and 2021.
As a result, Peloton's stock hit a record high of $167.42 on Jan. 13, 2021. That equaled a 477% gain from its IPO price of $29 on Sept. 29, 2019. At its peak, Peloton's enterprise value reached $47.2 billion, or 12 times the revenue it would generate in fiscal 2021 (which ended in June 2021). Today, it trades at about $3 with an enterprise value of $2.7 billion, or just 1 times its projected revenue for fiscal 2024.
Image source: Peloton.
Peloton's stock crashed because it couldn't maintain its momentum after the pandemic waned. Fewer people bought its bikes and treadmills as gyms reopened and cheaper competitors entered the market. A recall for Peloton's treadmills then tarnished its brand, and co-founder and CEO John Foley abruptly stepped down in 2022. Rising interest rates also compressed its valuation and highlighted its ugly losses.
Therefore, it's easy to see why investors have abandoned Peloton. But if we take the contrarian view, we can see how its stock might rise tenfold -- which would only bring it slightly back above its IPO price -- if its turnaround efforts pay off.
How is Peloton trying to revive its business?
Peloton's new CEO, Barry McCarthy, has been trying to stabilize its business by aggressively cutting costs, outsourcing its production to a Taiwanese manufacturer, and selling its products on third-party retailers like Amazon to expand its presence beyond its first-party website and physical showrooms. McCarthy is also trying to expand Peloton's higher-margin subscription business to curb its dependence on its lower-margin bikes, treadmills, and equipment. To accelerate that strategy, Peloton reduced its equipment prices and raised its subscription fees.
In the second quarter of fiscal 2024, Peloton generated 57% of its revenue from subscriptions and the remaining 43% from equipment. But over the past year, its subscription growth decelerated as its equipment sales declined.
Metric | Q2 2023 | Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 |
|---|---|---|---|---|---|
Subscription revenue growth (YOY) | 22% | 15% | 10% | 1% | 3% |
Equipment revenue growth (YOY) | (52%) | (45%) | (25%) | (12%) | (16%) |
Total revenue growth (YOY) | (30%) | (22%) | (5%) | (3%) | (6%) |
Data source: Peloton. YOY = year over year.
Peloton ended the second quarter of fiscal 2024 with 3 million paid subscriptions, equaling about 1% growth from both the previous quarter and the prior-year period. It expects that figure to hold steady at about 3 million for the full year. New partnerships, including a deal with Lululemon Athletica to sell its athletic apparel and exclusively provide its digital fitness content, could lock in those precious subscribers.
For fiscal 2024, Peloton forecasts revenue will dip 3% to $2.7 billion. But it also expects the expansion of its higher-margin subscription business and its cost-cutting measures to boost its gross margin from 33% in fiscal 2023 to 44% in fiscal 2024. It also aims to narrow its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss from $208.5 million in fiscal 2023 to a midpoint of $50 million in fiscal 2024.
What's next for Peloton?
Looking further ahead, analysts expect Peloton's revenue to rise at a compound annual growth rate (CAGR) of 2% from fiscal 2023 to 2026. That growth rate might seem anemic, but it suggests that the business is stabilizing. They also project that its adjusted EBITDA will turn positive in fiscal 2025 and more than triple in fiscal 2026.
Metric | FY 2024 | FY 2025 | FY 2026 |
|---|---|---|---|
Revenue | $2.71 billion | $2.82 billion | $3.00 billion |
Adjusted EBITDA | ($62 million) | $41 million | $138 million |
Analysts' consensus estimates as of April 21, 2024. Data source: Marketscreener.
We should take those estimates with a grain of salt. But if it hits those targets and its enterprise value-to-revenue ratio rises to a modest 3 times sales, its enterprise value could more than triple to $9 billion by fiscal 2026.
How could Peloton's stock rise 10x?
Peloton could continue to grow as the connected fitness market stabilizes and expands. According to Markets and Markets, the global connected gym equipment market could still expand at a CAGR of 8.35% from 2024 to 2030.
If Peloton matches analysts' expectations for fiscal 2026 and matches the market with a CAGR of 8.35% through 2034, it could generate $5.7 billion in revenue by the final year. If it's still trading at 3 times sales, its enterprise value could reach $17.1 billion, which would equal a six-bagger gain from its current price.
But if it's trading at 5 times sales, its enterprise value would climb to $28.5 billion and generate a tenfold return from its current price. I'm not saying Peloton's shares will actually produce a 10-bagger gain within a decade, but its stock looks like a deep-value play and might just surprise the bears with its improving fundamentals.
Should you invest $1,000 in Peloton Interactive right now?
Before you buy stock in Peloton Interactive, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Peloton Interactive wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of April 22, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Lululemon Athletica, and Peloton Interactive. The Motley Fool has a disclosure policy.
