Peloton (NASDAQ:PTON) was among the hottest meme stocks before topping out at a maximum closing price of $167.42 in 2021. Yet within a few years, it shed almost all of its value to trade below $5 per share today.
The well-known maker of exercise bikes paired with guided workouts is now struggling to re-ignite its growth, leading many investors to wonder what the future holds for this deeply distressed stock.
Peloton’s Losses Have Expanded
Peloton has lost $1.26 billion over the last 12 months, many times over what the company lost in its earlier years.
In 2020, shortly before the stock reached its all-time high, the company lost just $72 million. Peloton’s margins are also very negative. For example, the 12-month net margin currently standing at -31.9%.
It’s also important to consider these losses in context to get a sense of scale. Peloton’s total market capitalization is just $1.63 billion, and its trailing 12-month sales is $2.73 billion.
In other words, its annual losses at this point equal nearly half of its sales and over 75% of the company’s total market cap.
Performance Is Still Rocky
In order to bounce back, Peloton needs a significant growth catalyst. Unfortunately, the most recent financial results show only modest signs of real overall improvement.
In Q4, Peloton’s total membership fell by 4% year-over-year, while paid memberships ticked up just 1%.
Revenue from the core connected fitness business saw strong quarter-over-quarter growth but was still 16% lower than in the year-ago period.
Two concrete improvements did show up in the report. Gross profit increased by 27%, while free cash flow rose by 61%.
With Peloton still losing nearly $195 million in the quarter on revenues of $744 million, however, it’s difficult to see these as significant gains. Even with better gross profits and cash flow rates, Peloton will have to make real progress toward paring its losses in order to attract investors back to the stock.
Peloton’s outlook for the remainder of its current fiscal year also still appears bleak. Management expects sales and subscriptions to remain stagnant, and total revenue is expected to contract by about 3%.
Assuming the company continues to perform at its current level, it’s likely that the stock won’t see any significant upward pressure.
Peloton Could Be a Trap
With shares down by more than 95% from their all-time high, Peloton’s valuation has come down to very low levels. Shares trades at 0.6x sales, well below the range one would expect for a growth-oriented company.
The persistent problem is that Peloton continues to post steep losses and seemingly has little prospects to reach profitability anytime soon. As such, it’s likely that Peloton represents a trap, in other words a stock that seems cheap but really is not.
This is especially true when Peloton’s long-term debt load is taken into consideration. The company has borrowed about $1.7 billion, further deteriorating its financial standing. While this debt level has remained steady since 2022, the losses that Peloton faces makes it likely that the company will eventually have to resort to further borrowing.
Furthering the woes is the statistic that reveals about 18% of shares are sold short, indicating heavy expectations of bearish sentiment. Some speculators appear to believe a short squeeze could occur, but so far there is little concrete evidence of such a squeeze emerging.
Is There a Bull Case for Peloton?
Clearly, Peloton has wildly underperformed the optimistic expectations from a few years ago. With that said, there are some small bright spots left in the company’s outlook. For example, retail partnerships with Dick’s Sporting Goods and Amazon have helped Peloton reach a broader group of potential buyers.
Another bullish factor is the fact that Peloton is still overwhelmingly owned by institutional investors. Nearly 80% of the company’s shares are held by institutions, though much of this ownership was established in 2021 and 2022. This high level of institutional ownership may provide some support for the shares.
Finally, analysts do forecast modest gains from Peloton in the short term though investors should be cautious. Indeed, the lowest price target of $3, for instance, would result in a further loss of 34%.
Where Will Peloton Shares Be in 5 Years?
According to analysts consensus, Peloton stock could rise as high as $6 per share in 5 years.
Despite a few areas of business improvement, Peloton appears set to either plateau at its present level or even continue its decline.
Looking forward five years is difficult in the case of such a company, but there appear to be few significant growth catalysts for the company at the moment. Barring a radical turnaround, Peloton appears set to continue posting steep losses and generating lackluster investor returns.
It’s also worth considering that Peloton’s upsides appear small compared to its downsides. Selling through third-party retailers reduces margins, effectively negating the high-margin direct-to-consumer business model on which much of the brand’s onetime value was based.
Likewise, creating fitness content can be profitable, but it’s also unlikely to revive a large company. These initiatives could add value if Peloton was basically profitable, but they don’t seem large enough to turn the company’s fortunes around.
Peloton appears to be heading for a gradual decline that could stretch out over many years. It’s far from impossible that the stock will have its ups and downs, and future growth initiatives could revitalize the company.
At the moment, however, the company appears to be almost entirely a speculative investment that carries very high risks. It may not be down and out for good, but there is not a great deal to like about the company at the moment.
A final consideration is that Peloton could be a ripe target for acquisition. A larger company with more capital and marketing know-how could turn the company around, and Peloton’s current pricing would make it a fairly inexpensive buy.
Apple has been floated as a potential buyer because Peloton could add value to its fitness products. As such, it’s entirely possible that Peloton could still exist as a brand under the umbrella of a much larger company five years from now, and for shareholders that may be the only real hope on the horizon for a fast recovery.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.