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Peloton Stock: Should You Buy the Dip or Dodge the Value Trap?

Barchart - Wed Sep 6, 2023

Peloton (PTON) stock hit all-time lows last month after it released fiscal Q4 2023 earnings, and revealed yet another massive loss. While the stock has since rebounded from its lows, PTON is still considerably below its IPO price of $29 - it's now trading around $6, a share price that represents less than 4% of its January 2021 all-time highs.

To be sure, growth stocks – especially those in the once-popular “stay-at-home” pack – have had a tough time for the last two years. Names like Zoom Video Communication (ZM), Teladoc Health (TDOC), and Chegg (CHGG) have all fallen hard from their highs.

Peloton Stock Fell to All-Time Lows in August

However, Peloton’s underperformance stands out, even in a challenging macro environment. The maker of exercise bikes is also battling multiple headwinds at the company level – including a recent recall due to a faulty seat, which does not reflect well on the company’s brand image or product quality.

Peloton also replaced its co-founder John Foley and appointed former Netflix (NFLX) and Spotify (SPOT) executive Barry McCarthy as CEO, who then embarked on a transformation plan for the fitness equipment company. However, markets haven’t been too impressed by the turnaround – at least, that’s what the price action tells us.

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Peloton Stock Forecast: Analysts Turned Bearish After Q4 Earnings

Peloton reported a wider-than-expected loss in fiscal Q4, while its subscriber count fell by 29,000 in the quarter. 

Wall Street analysts turned even more bearish on PTON after the report, as Bank of America and Needham – both of which had a Buy rating on the stock ahead of the release – downgraded it to Hold after the disappointing results. Multiple other brokerages - including Bernstein, BMO Capital Markets, and JPMorgan - also lowered Peloton’s target price after earnings. 

Overall, PTON has received a consensus rating of Moderate Buy from the 24 analysts that cover the stock. Eight analysts rate it as a Strong Buy and 2 as a Strong Sell, with the remaining 14 rating it as a Hold. Its mean target price of $10.43 implies an upside potential of over 62% from current levels.

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Is PTON Stock an Attractive Buy or a Value Trap?

Peloton stock has been falling from one low to the next. The stock trades at a next-12 months (NTM) price-to-sales multiple of 1.4x - which is not too far from the all-time lows, and well below the 4.18x post-IPO average. That said, it's not prudent to rely on these historical comparisons in Peloton’s case for two reasons.

First, the valuations of growth stocks have been hurt across the board by the Fed’s relentless policy tightening campaign, which has lifted interest rates to the highest in over 2 decades. Second, given the triple-digit revenue growth that Peloton was reporting during the COVID-19 pandemic, its sales have fallen YoY for the last two fiscal years.

In a nutshell, the relatively low valuation multiples don’t necessarily mean that PTON stock is undervalued at these price levels.

Should You Buy or Sell PTON Stock?

Let’s now look at various arguments – both for and against – buying Peloton stock. 

On the bullish side, the worst seems over for Peloton, and the company is now targeting YoY revenue growth. Wall Street analysts, meanwhile, predict that Peloton’s revenues in the current fiscal year will be similar to the previous year, and then rise by 7.4% in the next fiscal year.

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Peloton is also targeting positive free cash flows in the back half of the current fiscal year - and if it can deliver on the metric, it would be a major milestone. The company has taken up several initiatives to this end, like selling refurbished bikes and offering fitness equipment on rent. It has also partnered with multiple third parties like Amazon(AMZN) and Dick’s Sporting Goods (DKS) to sell its products, and is also looking at international expansion.

Peloton has also pivoted to a subscription business, and revenues from subscriptions now outstrip product revenues by a wide margin. Usually, the subscription model is higher margin, and companies offering subscription-based products command a valuation premium due to greater revenue visibility.

During the fiscal Q4 earnings call, McCarthy was quite upbeat on the company’s outlook, and said, “There's this enormous disconnect between the stock price and the energy in the building around all of the partnerships and co-development things that are cooking.”

To be sure, McCarthy has taken several measures to revamp Peloton, and has been quite candid about the fact that corporate turnarounds are easier said than done.

What Could Go Wrong for Peloton?

On the other hand, there are several risks that Peloton investors need to watch out for. The business continues to lose money, as the home fitness equipment that Peloton sells doesn’t have the same kind of appeal that it used to during the lockdowns. The product recalls haven’t done any good for Peloton's brand, either – not to mention the financial implications.

That said, I believe at these prices, PTON looks like a stock worth considering. Even though it might not reclaim its all-time highs in the foreseeable future, Peloton looks like a risk worth taking - with a small allocation - as it can deliver decent returns, if McCarthy is able to execute on his planned business turnaround.


On the date of publication, Mohit Oberoi had a position in: AMZN , TDOC . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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