Peloton: More Pain Less Gain

Peloton Interactive, Inc. (NASDAQ:PTON) is a provider of reciprocal exercise products in the United States and internationally. The company has millions of members who interact with Peloton's application platform, which includes instructor-led sessions. The classes are comprehensive and can be accessed on-demand.

I am bearish on PTON stock.

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Tailwinds Dying Down

The pandemic had varying effects across different industries. Some sectors, like travel-related stocks, were decimated. Others, such as ecommerce stocks, enjoyed a boon. Peloton was one that benefited tremendously when gyms were closed and people were stuck at home.

Unfortunately, Peloton has a few major issues. First, like many who begin to exercise with gusto and then fade, usage has dropped significantly. Next, gyms are reopening, quelling demand for home fitness products. Finally, the stock is priced as a high-growth stock, but guidance is not calling for growth.

Usage Slowing Amidst Gym Resurgence

The old joke that after six months a treadmill turns into a tremendously expensive coat hanger is grounded in truth. Many are enthusiastic to begin a new journey toward healthy living, only to have the enthusiasm wane significantly over time.

Peloton does not appear to be immune to this reality. According to Apptopia, Peloton app installations grew 245% in March of 2020 - the start of the pandemic in the United States. In 2021, however, the average daily usage fell 42% in just four months. In total, the average daily usage has fallen each month since February 2021. This is a massive neon red flag for Peloton and its shareholders.

At the same time, people are also returning to the gym. Gym traffic is approaching a return to January 2020 levels, nationwide. Interest in at-home fitness equipment peaked all the way back in April 2020, according to Jeffries. Because of this, Peloton shareholders should be taking stock of their positions.

Revaluation Happening

Peloton's quarterly revenues grew over 170% from December 31, 2019 through March 31, 2021. These are incredible results. Wall Street began to value the stock as a high-growth play. The problem is that that the hurricane-force tailwinds would not last forever.

When people began to hit the gym and the app usage waned, so did revenues. From March 31, 2021 to June 30, 2021 the quarterly revenue fell a whopping 25.78%. The net loss for this single quarter was over $313M.

To combat the declines, Peloton is lowering prices, which will further hurt profits. The company also lowered guidance for the period ending September 30, 2021 to $800M from $1B.

Meanwhile, the stock trades at several times forward sales. This is how a growth stock will typically trade; however, Peloton is contracting. Compare to competitor Nautilus (NLS), which trades at less than 1x forward sales, but NLS is also profitable. Because of this, PTON stock is dropping and will likely continue to drop until the valuation is more in line with guidance.

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Wall Street’s Take

Wall Street analysts are somewhat bullish on PTON stock, with a Moderate Buy consensus rating, based on 16 Buy, four Hold, and two Sell recommendations.

The average Peloton price target of $125.80 implies 48.2% upside potential. However, caution is urged as the stock has over 10% of the float sold short and has received two rare Sell ratings from sell-side analysts. Investors should also expect analysts to begin to lower targets, given macro conditions.

Summary on Peloton

Peloton enjoyed a massive tailwind from the pandemic. People were forced to exercise at home, or not at all. Results reflected this and investors, somewhat shortsightedly, bid the stock up to growth stock valuations. Now the tailwinds are a mere breeze and sales and usage are shrinking. The company may still have a bright future. However, in the short to medium-term, the stock will continue to revalue downward.

Disclosure: At the time of publication, Bradley Guichard did not have a position in securities mentioned in this article.

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