Peloton Stock Pedaling into Economic Storm Clouds

Cindy F. Cape

Shares of stationary bike maker Peloton Interactive (PTON) have been under mounting pressure as of late amid concerns over its debt load and the economic downturn on the horizon.

Undoubtedly, the pandemic winner has seen its greatest tailwind to date, fade away. But with shares off around 94% from their all-time highs, it can be easy to assume the stock has way overshot to the downside.

How could it be that such a pandemic winner is well below where it was before the pandemic?

It’s a perplexing situation for Peloton. The company is shedding cash at a staggering rate, and its debt load will feel much heavier as the Federal Reserve raises interest rates. The company clocked in a steep net loss of nearly $2 billion over the past year. At this pace, Peloton needs to pull out all the stops to end its tumble toward $0 per share.

Indeed, Peloton seems more like a zombie company destined for zero rather than a fallen former market darling capable of regaining its luster. Peloton has many sticky customers who are more than willing to stay subscribed through the coming economic downturn (Peloton subscriptions are less than gym memberships, for those who already own the equipment).

That said, even the biggest Peloton fan can’t help the firm give its bike or treadmill sales a jolt. Big-ticket discretionary goods are cyclical, and when the lights go out on the economy, things can get really ugly, especially for firms weighed down by considerable sums of debt.

On TipRanks, PTON scores a 2 out of 10 on the Smart Score spectrum. This indicates a potential for the stock to underperform the broader market.

Taking Steps to Improve the Balance Sheet

The dangers of debt should not go unnoticed, especially at a time like this. Although the environment ahead could become more hostile, management has taken steps to improve its financial footing.

The company is pulling back on production at its Ohio plant, while engaging in controversial layoffs. Such moves will help improve Peloton’s survivability prospects. And, of course, the firm has been raising debt —Peloton most recently raised $750 million from creditors— where it can.

The recent loan is encouraging, as management looks to focus more on higher-margin software and away from hardware. Unfortunately, Peloton’s shift away from hardware is unlikely to do the firm any favors in the near future.

Sooner or later, the company needs to trim its mountain of debt before the weight of higher interest rates crushes the firm. Though the recent third-quarter earnings call was quite hopeful, many Wall Street analysts are staying cautious with the name.

Despite the dire situation, I do think Peloton is more than capable of getting back on its own two feet again. A software pivot can help power the stock’s next leg higher. Before such a run, though, Peloton could be in for a further spill as macro pressures mount on.

With few, if any, catalysts to look forward to over the coming year and additional headwinds approaching up ahead, it’s hard to find any reason to catch the falling knife as it back-pedals into single-digit territory. Until something fundamental changes, I am neutral on the stock.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, PTON stock comes in as a Moderate Buy. Out of 26 analyst ratings, there are 14 Buy recommendations, 10 Hold recommendations, and two Sell recommendations.

The average Peloton price target is $21.48, implying an upside of 110.4%. Analyst price targets range from a low of $12 per share to a high of $35 per share.

The Bottom Line on Peloton Stock

During COVID-19 lockdowns of 2020, Peloton had an enviable competitive positioning. Now that the U.S. is open and likely to stay that way through the rest of the pandemic, the company’s moat seems to have withered away to nothing.

Gyms and new entrants in the digital fitness space have made it tough for Peloton to retain subscribers. Fortunately, a software shift could help the firm gain its edge back. By investing in top-notch fitness experiences, Peloton can improve its competitive footing. In the meantime, Peloton needs to focus on surviving the coming storm.

In due time, the shift from at-home fitness to gyms will reach an equilibrium. Until then, Peloton may need to resort to further discounting to get more consumers to join the Peloton “family.” The more people have the hardware, the likelier they are to be sticky subscribers of software services.

As the metaverse rolls out, one has to think that Peloton is ready to create next-generation fitness experiences. Though still nascent, Peloton does have a pathway towards greater growth as next-gen technologies roll out over the coming decade. Peloton just needs to make it through the last wave of the storm. I think it will.

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