Peloton Stock Is Likely to Fade as Quickly as a New Year’s Resolution

Stocks to sell

When investors abandoned Peloton (NASDAQ:PTON) stock in droves after the company posted quarterly results on Nov. 4, people should have expected it.

Peloton (PTON stock) sign on city storefront

Source: JHVEPhoto / Shutterstock.com

Since July, when PTON stock peaked, bulls failed to take the share price above the 50 and 200 day moving averages. The leisure stationary exercise bike maker suffers from a troubling negative trend.

In an almost post-Covid world where international travel resumes, consumers are questioning the need for an expensive bike that costs thousands of dollars.

Getting virtual classes at home has a subscription fee. As people tire of the same routine, Peloton faces increasing headwinds.

Disastrous Results Hurt PTON Stock

In the first fiscal quarter, Peloton posted revenue growing by only 6.2% from last year to $805.2 million.

It lost $1.25 a share (on a GAAP measure). The business momentum slowed despite connected fitness subscriptions growing by 87% to $2.49 million. It ended the quarter with more than 6.2 million subscribers.

The firm posted a few strong key metrics. For example, net monthly connected fitness churn was only 0.82%. It retained 92% in the last 12 months.

Furthermore, its connected fitness subscription workouts grew by 55% to 120.5 million. Unfortunately, workouts per connected fitness subscriptions fell from 20.7 last year to 16.6 in Q1.

The lower customer engagement forced Peloton to impose a hiring freeze and lower its forecast. In the second quarter, the company expects revenue in the range of $1.1 billion to $1.2 billion.

It will lose money again, as it expects a negative $325 million to negative $350 million adjusted EBITDA.

For FY 2022, Peloton expects a negative $425 million to a negative $475 million adjusted EBITDA.

Cash Burn a Non-Issue

On Nov. 16, Peloton announced a stock sale. It will underwrite 23.913 million Class A common stock for $46 a share. PTON stock briefly rallied after the capital raise but ended lower a day later. It trades just shy of $43 today.

The company has a strong, recognizable brand name. Speculators are betting that the fad is not fading yet.

The company’s cost control constraints will slow the quarterly cash burn. Loaded with over $1 billion in equity, the bike firm has plenty of capital to pivot the business, invest in growth, and re-ignite its business momentum.

Momentum investors who bet on the rising fad for returns should walk away. The business optimism shifted from neutral, after the pandemic.

Now it is excessively negative. Speculators could bet that Peloton may increase subscriptions and customer workout activity. During the winter months, people may renew their interests in exercising at home.

Peloton’s stock rally may prove short-lived. Shares trade at a high market capitalization of almost $15 billion and a price-to-sales ratio of 3.6 times.

Nautilus (NYSE:NLS) trades at 0.33 times P/S. Its market capitalization is just $240 million. Nautilus may trade at a severe discount, but it is on a sustained downtrend like Peloton stock.

Bearish Chart

The volume increased as Peloton’s stock price fell, a bearish signal.

In addition, its moving average convergence divergence collapsed after the earnings report.

In the chart, the blue line crossed over below the exponential moving average.

Investors need to look at Peloton’s stock price before it broke out last April 2020. As the pandemic unfolded and stock markets crashed, Peloton traded as low as around $20. This time, selling pressure may ease and the stock could settle at around $40.

Peloton’s fair value will depend on management’s ability to accelerate business growth. Investors are doubtful.

On the conference call, Chief Financial Officer Jill Woodworth assured shareholders that it did not need to raise capital.

“We don’t see the need for any additional capital raise based on our current outlook,” she said. “As we mentioned, we’re taking significant steps to adjust our expenses across COGS and OpEx with this revised revenue guidance. And we have a lot of levers to pull.”

Two weeks after the conference call, the company realized it needed to take advantage of the still forgiving markets. Easy access to capital may end.

The Federal Reserve will soon raise interest rates to slow inflation. That would hurt stock prices and increase the cost of debt.

Strong Balance Sheet

Before the stock sale, Peloton had $924 million in cash. With more cash available, the firm may plan its business strategy over the next decade.

It will need to re-align its product mix. This could include offering lower-priced bikes or selling play-as-you-go classes instead of subscriptions.

Any new promotion, subscription-pricing plan, or introduction of a new product will cost capital.

Peloton will need to spend on research and development. This will increase quarterly losses and will only pay off in the future.

Your Takeaway

Consumers still have plenty of disposable income.  That could change. Inflation rates are soaring. The Fed may realize this is not transitory. People will then ask why they need a $2,000 stationary bike.

Peloton has plenty of planning to adjust to the changing customer demands. Wait for the company to post better results in future quarters before buying this stock.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.

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