The Peloton Sell Off Continues. Is The Stock Finally A Buy?

The sell-off in Peloton (NASDAQ:PTON) continues with the stock falling by almost 20% over the past month while remaining down by 68% year-to-date. There have been a lot of factors weighing Peloton down. Demand for the company’s at-home fitness products is on the decline, as people head back outdoors and to physical gyms. Over Q3 FY’22 (quarter ended March) revenue fell by around 23%, marking the company’s first year-over-year revenue decline since it went public and sales are projected to fall almost 30% year-over-year in Q4.  Peloton’s poor planning hasn’t helped either, as inventory has piled up, eating into the company’s cash as sales declined.  There are also renewed concerns about the U.S. economy and consumer spending, as surging inflation and rising interest rates put pressure on household budgets.

Now, although the tough near-term outlook for Peloton’s hardware business and its plunging stock (down from $160 in December 2020 to just $11 now) might make Peloton look like a falling knife, there are some redeeming factors as well. Peloton’s lucrative subscription business has continued to expand, despite the recent headwinds and this could provide a floor for the stock. Over Q3, subscription revenue rose by 54% year-over-year to $370 million, with subscription gross margins rising by 350 basis points to 68.1%. Peloton’s base of connected fitness subscribers – who pay for classes synced to their Peloton equipment – rose 40% to 2.96 million, although quarterly net adds slowed considerably. Peloton’s core customer base also appears very loyal, with churn rates standing at a mere 0.75% – that’s roughly at par with Verizon’s wireless postpaid phone churn, which is seen as one of the stickiest consumer subscriptions. Peloton also appears to believe that it has some pricing power in this business, with its connected fitness fees set to rise from $39 per month to $44 in July. Considering this, it might be more helpful to view Peloton’s hardware as a gateway to the more lucrative subscription business.

Peloton’s valuation is also compelling. The stock now trades at a mere 1x consensus FY’23 revenues, down from over 6x pre-pandemic. There remains a real prospect that it could eventually be re-rated higher, as subscription revenues continue to account for a greater mix of sales. For example, over Q3, subscription revenue accounted for close to 39% of total sales, up from just 19% a year ago. Peloton also has adequate liquidity to manage its business in the near term. The company had about $879 million in cash and cash equivalents at the end of Q3 and also entered into an agreement to borrow $750 million in five-year term debt. Peloton also expects to generate positive free cash flow in FY’23, via cost cuts, inventory dilution, higher subscription sales, and lower capital spending plans. We estimate Peloton’s Valuation to be around $25 per share which is well ahead of the current market price. Check out our analysis on Peloton Revenues: How Does Peloton Make Money for a closer look at Peloton’s business model, key revenue streams, and how they have been trending.

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