Peloton Stock Has More Upside Despite Struggling Equipment Business

Peloton stock (NASDAQ:PTON) posted a better-than-expected set of Q2 FY’23 results, giving investors some confidence that the turnaround plan unveiled last year is working. Peloton stock was up by 26% in Thursday’s trading following the report. While revenues fell by 30% compared with the year-ago period to $792.7 million, they came in ahead of estimates. Peloton’s net losses narrowed versus last year to $0.98 per share. Sales of connected fitness products, such as treadmills and exercise bikes, fell by about 52% versus last year to $381.4 million as the work out from home trend seen through Covid-19 continued to ease. On the other hand, the sale of subscriptions – which includes workout content plans that sync up with Peloton’s connected equipment, or work as a standalone smartphone app – rose by 22% versus last year to $411.3 million, coming in ahead of the equipment business.

Apart from weakening demand in recent quarters, Peloton was weighed down by a host of other issues including bad inventory planning, and poorly timed investments into production. However, the company has been overhauling its business via multiple initiatives in recent quarters. For example, it started outsourcing production of its fitness equipment, reduced its workforce by over 50%, and reduced its annualized run rate expenses by roughly $830 million. The company also launched third-party sales of its products via Amazon and Dick’s Sporting Goods. Over the second year of the turnaround, the company is looking to return to year-over-year revenue growth and also approach sustained cash flow breakeven.

So, is the stock a buy at current levels? Even post Wednesday’s rally Peloton stock remains down by about 90% from all-time highs seen in late 2020. However, we still remain marginally positive on the company, with a $20 price estimate, which is about 20% ahead of the current market price. Although the hardware business is seeing a decline, it should stabilize, driven by new product launches and new partnerships in the corporate and commercial space. Moreover, the growing subscription business should provide some upside for the stock, given its thicker margins (about 68% in Q4, versus presently negative margins for the equipment business).

Peloton’s valuation is also quite attractive. The stock now trades at a mere 2x consensus FY’23 revenues, down from over 6x pre-pandemic. Now, this is in part due to the overall revenue decline, as opposed to the growth through the pandemic. However, if we exclude Peloton’s hardware business, Peloton is valued at just about 3.5x the estimated 2023 subscription revenues, which is below the likes of Netflix, which trade at about 5x revenue. See our analysis of Peloton’s Valuation for a more detailed look at what’s driving our price estimate. Also see 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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Returns Feb 2023
MTD [1]
YTD [1]
Total [2]
 PTON Return 27% 106% -42%
 S&P 500 Return 1% 7% 84%
 Trefis Multi-Strategy Portfolio 2% 14% 260%

[1] Month-to-date and year-to-date as of 2/2/2023
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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