Is It Too Soon to Buy Beaten-Down Peloton Stock?

The at-home fitness industry has had its ups and downs as consumer spending patterns shift in the post-pandemic era - especially with consumers in 2024 finally starting to tighten their belts due to stubbornly high inflation.

Peloton Interactive (PTON), once a favorite as gyms shut down during COVID-19, is really feeling the pinch. Its stock price has nosedived, down 97% from its January 2021 highs, and another 33% so far this year.

The latest body blow came on May 5, when Peloton announced the resignation of CEO Barry McCarthy after just two years at the helm, along with another round of job cuts as part of its restructuring efforts. The stock initially rallied on the news, then closed lower on the day as the headlines reignited debates about Peloton's long-term viability, and whether the battered stock presents a buying opportunity for contrarian investors.

Despite these challenges, Peloton's current valuation at 0.43x forward sales suggests a level of affordability that could be enticing to some investors - and apparently some suitors, too. PTON is sharply higher today, up 16% and on pace for its best daily performance since February 2023, after CNBC reported that private equity firms are now circling the bargain-priced exercise equipment company.

Peloton has declined to comment on the speculation, though traders have been quick to price in their own expected bid today. However, with the company still deep in the red - and given the stock's volatile history - is now a good time to bet on a turnaround for PTON, or even a takeover? Here's a closer look.

Underperforming Peloton Stock Pops On Takeover Talk

Peloton (PTON) has been on a wild ride lately. The stock has shed about 47% of its value over the last year - but since setting a new post-earnings low of $2.70 last Thursday, PTON has surged 51.8% higher, including today's takeover-related rally. Despite burning massive investor wealth in recent years, Peloton still has a market cap of about $1.3 billion. 

Peloton's latest earnings report, released on May 2, offered a mixed bag. On the one hand, the company missed analysts' expectations with a loss per share of $0.45 (versus the anticipated $0.39 loss) and revenue of $717.7 million (compared to the consensus forecast of $723.21 million). It marked the 13th straight consecutive quarter of losses for Peloton.

On the other hand, the company managed to hit a significant positive milestone, too - by reporting positive free cash flow of $8.6 million for the first time in over three years. 

Peloton's Turnaround, Take 2

Peloton is also shaking things up with a major leadership overhaul. Barry McCarthy is stepping down from his roles as President, CEO, and Board Director to take on a strategic advisory role until the end of the year. Meanwhile, Karen Boone and Chris Bruzzo are stepping in as Interim Co-CEOs, with Jay Hoag taking over as the new Chairperson of the Board. 

The company is also tightening its belt with a robust cost-cutting plan. They’re aiming to trim more than $200 million in expenses by the end of fiscal 2025, in an attempt allocate resources more intelligently, and ultimately boost investments in tech and content, enhance member support, and optimize marketing. 

Amidst these strategic adjustments, Peloton is also seizing growth opportunities. A notable move is their partnership with Hyatt Hotels Corp.(H), which will see Peloton bikes rolling out to over 800 Hyatt locations across several countries. This partnership extends into the loyalty space with the World of Hyatt program, where hotel guests can earn extra loyalty points by working out on Peloton equipment. Peloton’s strategy here integrates fitness with lifestyle, and leans on the value of its higher-margin subscription business over the struggling hardware segment.

What Do Analysts Expect for Peloton?

For the upcoming fourth quarter of fiscal 2024, which wraps up in June, analysts are bracing for a loss of $0.24 per share. That's expected to contribute to a full-year loss of $1.61 per share for fiscal 2024. While both of these estimates would represent a significant year-over-year improvement, Peloton clearly still has some hurdles to overcome as it works toward achieving profitability.

Out of 21 analysts, the consensus opinion on Wall Street leans towards a cautious “Hold.” Four analysts are endorsing a “Strong Buy,” suggesting they believe Peloton can overcome its current challenges. Meanwhile, 14 analysts recommend a “Hold,” one suggests a “Moderate Sell,” and two advocate for a “Strong Sell.”

Bank of America (BAC) analyst Curtis Nagle counts himself among the Peloton skeptics. After last week's earnings report, he reiterated a “Sell” rating and $3.25 price target on PTON, writing that the company's on-par subscription sales, positive free cash flow, and cost cuts didn't do much to alleviate his concerns over their ability to refinance $1.7 billion in debt.

Nagle's lowball price target is a discount of 20% to Peloton stock's intraday perch, while the mean target price of $6.93 is still 69% overhead - and that's after post-earnings cuts from analysts at Bernstein, Baird, and Macquarie, to name a few.

The Final Verdict: Risks Remain

So, should you buy Peloton stock or steer clear? It's all up to your risk appetite from here. On one hand, the company is still bleeding money and the stock has been a rollercoaster ride for investors. Nevertheless, the dirt-cheap valuation and new leadership team could make it an attractive turnaround play for risk-takers - particularly with the potential for a private-equity takeover in the mix, though it's hard to say how much of that upside might be priced in at current levels (particularly with Peloton's hefty debt load).

So if you've got the stomach for volatility and believe in Peloton's ability to get its act together - or at the very least, find a willing white knight - then taking a small speculative position here could pay off big down the road. But if you're risk-averse or prefer a bit more earnings and cash flow visibility in your investments, Peloton's journey is most likely one you'll want to sit out at this particular fork in the road.