Peloton Interactive (NASDAQ: PTON) is a sport-equipment business that went from financially fit to financially out of shape in a stunning reversal of fortunes. The company’s issues, particularly as they relate to weak sales trends and a lack of profitability, are well-publicized. It’s hard to believe the business was thriving just a few short years ago.
Since hitting a peak price in January 2021, this consumer discretionary stock has cratered 98%. Some daring investors might be eyeing the stock in the hopes that a successful turnaround can be orchestrated. So where will Peloton be in three years?
Hard to find success
The fitness industry doesn’t lend itself to durability for the companies that operate in it. It is characterized by short-lived fads that fall off the map faster than they become the talk of the town. What’s more, it’s usually a poor bet to assume people will stick to their diet and workout regimes.
Peloton looks to be another chapter in this disappointing book. Its revenue in Q3 2024 (ended March 31) was down 4% year over year and down 43% versus the same quarter three years before. Even more alarming, the company’s connected-fitness subscriber base, people who have purchased a piece of equipment, is flatlining.
Making matters worse, Peloton is losing money in spectacular fashion. In the past 12 quarters, it has posted a cumulative net loss of $4.9 billion. That’s almost four times more than its current market capitalization. Add this to its sizable debt burden and interest payments, and bankruptcy might not be out of the question.
I see no reason why this worrying situation will improve. Consumers just aren’t as intrigued as they once were by the thought of spending a four-figure sum for workout equipment they might not use all the time.
A takeover target?
After Peloton reported its fiscal 2024 third-quarter financials, there were rumors swirling that the business is drawing interest from private equity groups looking to take the company over. Perhaps Peloton will do better outside the public spotlight. And these investors could really focus on aggressive cost cuts to drastically improve the finances of the business.
But I’m not sure if this will solve Peloton’s key problem, which is boosting demand from consumers. Former CEO Barry McCarthy was unsuccessful in his two-year stint at reviving the business. And he had valuable experience as an executive at Netflix and Spotify. This doesn’t give me confidence that private equity sponsors are the solution.
Maybe a more realistic outcome when it comes to a complete takeover is that a corporate buyer purchases Peloton. A name that I’ve thrown around is none other than Apple. It has more than enough cash sitting around, in addition to the know-how in creating a successful hardware and software enterprise that could breathe life into Peloton. But it’s anyone’s guess if a deal is even in the cards.
Nonetheless, one can see how Peloton’s recognizable brand in both the fitness industry and consumer sector can drum up interest from potential suitors.
Too much uncertainty
Smart investors will look at the past few years and try to glean valuable insights that can inform portfolio decisions going forward. Peloton’s monumental rise and disastrous fall provides a unique case study. The key takeaway, in my opinion, is that rapid growth is almost always unsustainable. That’s because consumer preferences, particularly for fad-driven products, can shift unpredictably.
At a price-to-sales ratio of 0.5, the stock looks so cheap that value-focused and risk-seeking investors might want to take Peloton for a spin. But based on the company’s notable troubles, which don’t look like they’re going to be resolved anytime soon, Peloton should be avoided at all costs. There’s a high chance that the shares will continue to lose money for investors over the next three years.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Netflix, Peloton Interactive, and Spotify Technology. The Motley Fool has a disclosure policy.
Where Will Peloton Stock Be in 3 Years? was originally published by The Motley Fool
From: Yahoo.com
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