Peloton (NASDAQ:PTON) shares hit rock bottom last month following the release of its fiscal Q4 2023 earnings report, which revealed yet another substantial loss. Although the stock has shown signs of recovery since then, it still remains far below its IPO price of $29, currently trading at around $6 per share, representing less than 4% of its all-time high in January 2021.
It’s essential to note that growth stocks, especially those in the once-popular “stay-at-home” sector, have faced significant challenges over the past two years. Prominent names like Zoom Video Communication (NASDAQ:ZM), Teladoc Health (NYSE:TDOC), and Chegg (NYSE:CHGG) have all experienced substantial declines from their peak valuations.
However, Peloton’s underperformance has been particularly noteworthy, even in this challenging economic climate. The company, known for its exercise bikes, has encountered multiple headwinds, including a recent product recall due to a faulty seat, which has cast a shadow on its brand image and product quality.
Additionally, Peloton made a strategic move by replacing its co-founder John Foley with former Netflix (NASDAQ:NFLX) and Spotify (NYSE:SPOT) executive Barry McCarthy as CEO. McCarthy introduced a transformation plan for the fitness equipment company, but market sentiment appears lukewarm about the turnaround efforts, as evidenced by the stock’s performance.
Peloton reported a larger-than-expected loss in fiscal Q4, coupled with a decline of 29,000 subscribers in the same quarter. Following these disappointing results, Wall Street analysts, including Bank of America and Needham, downgraded their ratings on PTON from Buy to Hold. Other major brokerages like Bernstein, BMO Capital Markets, and JPMorgan also lowered their target prices for Peloton after the earnings report.
As of now, Peloton holds a consensus rating of Moderate Buy from the 24 analysts covering the stock. Eight analysts rate it as a Strong Buy, while two consider it a Strong Sell, and the remaining 14 labels it as a Hold. The mean target price of $10.43 implies a potential upside of over 62% from the current trading levels.
Is Peloton Stock a Compelling Buy or a Potential Pitfall?
Peloton’s stock price has been on a continuous downward trajectory. It currently trades at next-12 months (NTM) price-to-sales multiple of 1.4x, which is not far from its all-time lows and well below the post-IPO average of 4.18x. However, it’s crucial to exercise caution when comparing Peloton’s valuation to historical metrics for two reasons.
Firstly, the valuation of growth stocks across the board has been impacted by the Federal Reserve’s persistent policy tightening, resulting in interest rates reaching their highest levels in over two decades. Secondly, despite reporting triple-digit revenue growth during the COVID-19 pandemic, Peloton’s sales have declined year-over-year for the past two fiscal years.
In summary, the relatively low valuation multiples do not necessarily indicate that PTON stock is undervalued at its current price levels.
Should You Consider Buying or Selling Peloton Stock?
Let’s examine the arguments both in favor of and against investing in Peloton stock.
On the positive side, it appears that the worst may be behind Peloton, with the company now targeting year-over-year revenue growth. Wall Street analysts also anticipate that Peloton’s revenues for the current fiscal year will remain stable compared to the previous year and then rise by 7.4% in the following fiscal year.
Peloton is actively working towards achieving positive free cash flows in the latter half of the current fiscal year, which would mark a significant milestone. The company has implemented various initiatives, such as selling refurbished bikes and offering fitness equipment for rent. It has also forged partnerships with third-party retailers like Amazon (NASDAQ:AMZN) and Dick’s Sporting Goods (NYSE:DKS) for product distribution and is exploring international expansion opportunities.
Furthermore, Peloton has shifted its focus to a subscription-based business model, with subscription revenues now surpassing product revenues by a considerable margin. Subscription models typically offer higher margins, and companies with such offerings often command a valuation premium due to increased revenue predictability.
During the fiscal Q4 earnings call, CEO Barry McCarthy expressed optimism about the company’s future, emphasizing the gap between the stock price and the company’s positive internal developments.
However, it’s crucial to acknowledge the potential risks associated with investing in Peloton. The company continues to operate at a loss, as its home fitness equipment no longer holds the same appeal it did during the pandemic. The product recalls have also negatively impacted Peloton’s brand reputation, along with financial repercussions.
In conclusion, at its current price levels, Peloton (PTON) may warrant consideration as a speculative investment. While a return to its all-time highs may not be imminent, Peloton could offer reasonable returns if CEO Barry McCarthy successfully executes his planned business turnaround. As with any investment, it’s essential to exercise caution and diversify your portfolio to manage risk effectively.
Featured Image: Megapixl
