Peloton (PTON) stock have struggled, dropping from its all-time highs above $171. The market has questioned Peloton’s at-home connected subscription platform can be monetized to produce sustainable results; but could a turnaround be in the works? After this morning's announcement that Peloton will sell some fitness equipment on Amazon in the U.S., shares surged in pre-market trading.
The exercise equipment maker is set to report fourth quarter fiscal 2022 earnings results before the closing bell Thursday. Peloton has been hurt from a combination of factors. But the company is taking steps to firm up its business, including cutting nearly 800 jobs, while closing some amount of its locations to preserve profits.
Management is also experimenting with "Fitness as a Service.” Peloton management is betting that the "Fitness as a Service” model can get more people excited about the products. The company has also initiated price increases on selects items such as the Bike+ and Tread products to boost its profit margins. "We have to make our revenues stop shrinking and start growing again, cash is oxygen, oxygen is life,” CEO Barry McCarthy said in a memo to employees.
Analyst Ronald Josey at Citigroup has applauded these moves, saying "While it remains early in Peloton’s turnaround, given continued strong engagement levels and its evolving go-to-market approach, we believe the service can build out its subscriber base.” Josey reiterated a Buy rating on Peloton’s with a price target of $28, expecting Peloton’s new strategy can lead to expanding gross margins and free cash flow. With reset expectations, on Thursday investors will want to hear how the company plans to deliver revenue and profit growth in the quarters ahead.
In the three months that ended July, Wall Street expect the New York-based company to lose 77 cents per share on revenue of $682.94 million. This compares to the year-ago quarter when the loss was 56 cents per share on revenue of $936.9 million. For the full year, the company is expected to lose $5.50 per share, worse than a 30-cent loss a year ago, while full-year revenue is expected to decline 10.8% year over year to $3.59 billion.
The projected widening loss from a year ago underscore how quickly the fundamentals of the business, particularly from a profitability standpoint, have struggled. In the most recent quarter, the company suffered a 40% year-over-year decline in product revenue. With roughly $1.4 billion in inventory on the books, and having burned close to $2 billion in cash in the first three quarters of the fiscal year, the move to raise prices on key products is an important factor in restoring not only the company’s near-term gross margins, but also long-term profitability.
In the third quarter after the company missed on the top and bottom line and issued disappointing guidance. Q3 revenue declined 23.5% year over year to $964.3 million, missing by $5.51 million, while the Q3 adjusted loss of $2.27 missed by $1.41. On the positive side, thanks to 195,000 in net additions, connected fitness subscriptions rose 42% year over year to 2.96 million. However, the guidance was disappointing, raising more questions about the company’s path towards profitability.
In that vein, there have been recent reports that the company can be an acquisition target. Given its struggles and the need for additional capital, a deal could make sense. But until then, it’s all about the execution and Peloton management must find a way to inject confidence back into the market by presenting a clear path towards growth and profitability. Its deal with Amazon could be a start; investors will be listening closely for more details about that and the impact it will have on Peloton.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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