Stock of the week: Peloton

2022 has been a pretty hostile environment for investors. Most stocks are down on the year. Even titans like Google and Microsoft are down by 23-24% from their all time highs. Other household names such as Disney and Facebook (Meta) are down 47-48% from all time highs.

Then there are others, such as Peloton, that are down by over 90%. The chart tells the story.

Peloton IPO’d on the 26th of September 2019 at a price of $29. But trading began at $27 and the stock drifted down, eventually hitting a low of $17.70 in March 2020.

The meteoric rise that followed was arguably a case of the right place at the right time. Covid hit, and gyms were closed along with pretty much everything else. People embraced Peloton’s social and physical offering. Ten months later, the stock was trading at all time highs of $171.

Fast-forward to today, 16 months after hitting those heady heights, and the stock’s trading back beneath that pre-pandemic low. The round trip is more than complete.

Now, some are questioning if this low price represents an opportunity. The question comes under many names: a tradeable bottom, good value now that the speculation has been washed out, and so on. After all, in most walks of life, buying something at a 90% discount would likely be seen as a fantastic deal. That doesn’t always hold true in financial markets.

Critics will say Peloton is cheap for a reason. The classic case of a company over-expanding in a time of unprecedented and ‘artificial’ demand. These differences of opinion, as the saying goes, are what makes a market.

Challenges lie ahead. Peloton appointed Barry McCarthy as CEO three months ago, and in his first earnings conference call, he told analysts that “the nature of turnarounds is they are full of surprises”.

The former Netflix and Spotify CEO laid out the company’s ambition:

“I know of digital apps that already have more than 100 million people that are focused on fitness. And I can’t for the life of me think why, given our success early in the category, that we couldn’t be one of those digital apps,”

In the last quarter, Peloton reported a total of approximately 7 million members, with 2.96 million connected fitness subscriptions. Subscribers aren’t necessarily the most pressing issue however. Peloton just recorded their biggest quarterly loss (-$757 million) since going public, and borrowed $750 million in 5 year debt to recapitalise.

The company has more inventory than anticipated. Treadmills and bikes are sitting at warehouses rather than in homes. CEO Farley acknowledged in a shareholder letter that this is far from ideal, but isn’t overly concerned, saying: The obsolescence risk is negligible, and we believe the inventory will sell eventually, so this is primarily a cash flow timing issue, not a structural issue.

Nevertheless, a few days later the company tweeted an emoji of a rowing boat to announce that the rower is coming soon too.

On many levels, FAAS (Fitness As A Service), or connected fitness makes sense as a concept in the digital era. One crucial question for investors now is whether that idea can translate into a solid, profitable business, especially as the global economy searches for post-Covid balance.

Not investment advice. Past performance does not guarantee or predict future performance.