Peloton Earnings Preview: Spin Cycle To Nowhere (NASDAQ:PTON)

Investment Thesis

Peloton Interactive, Inc. (NASDAQ:PTON) will report its fiscal Q1 2024 results tomorrow, Thursday, November 2nd, premarket.

And even if Peloton somehow finds some bunnies at the bottom of its bag with which to delight its investors positively, I make the case that this stock is unlikely to deliver investors positive returns over the next twelve months.

Indeed, I contend that investors will, in twelve months, look back to Peloton’s $5 share price as an aspirational price to head towards, not as the low price to enter this stock.

In sum, Peloton is overvalued, and its balance sheet is on a perilous footing. I recommend that investors avoid this stock.

Peloton’s Near-Term Prospects

In the first instance, I’ll discuss the bull case that attracts investors to the stock, before turning our focus towards the challenges that Peloton faces.

Peloton demonstrates strong potential for growth and market expansion, underscored by its strategic initiatives. Despite recent challenges such as product recalls, the company has sought to improve its cost structure (more on this soon).

With a focus on diversifying its product offerings, including a tiered digital app strategy and initiatives like Fitness as a Service and Certified Refurbished Programs, Peloton aims to enhance accessibility and appeal to a broader customer base.

Furthermore, its emphasis on international market expansion, partnerships with third-party retailers, and efforts to establish Peloton for Business indicate a commitment to extending its market reach.

Next, we’ll discuss the negative aspects of this stock.

Revenue Growth Rates Will Stabilize But At Rate?

First and foremost, in the best-case scenario, as Peloton’s comparables start to improve as it comes against its brutal negative revenue growth rates of fiscal 2023, Peloton’s fiscal 2024 could end up delivering flat year-over-year revenue growth rates.

One way or another, let’s be clear, putting aside all its panache and jazzy narrative, this is not a growth company.

My argument is reinforced by analysts’ estimates, see below.

How much longer will investors be willing to give Peloton the benefit of the doubt? It’s not only that its guidance for fiscal Q2 2024 is expected to be close to breakeven. It’s the fact that this business is simply running out of capital.

Over time, I’ve heard from countless investors stating that Peloton is fated to be bought out by Apple (AAPL) or Amazon (AMZN). And I ask why? Why would these companies be the white knights that rescue Peloton?

Profitability Problems

Despite its strong market potential, the competitive landscape within the fitness industry remains intense, with Peloton contending against brick-and-mortar gyms and digital fitness content platforms.

Peloton’s hardware gross margins have been under pressure, reflecting the impact of fixed costs and pricing dynamics in a competitive market. Achieving sustainable hardware gross margins while balancing pricing strategies and customer acquisition costs remains a critical challenge.

The company’s commitment to offering affordable options, such as its rental program and refurbished products, further complicates the margin equation, necessitating careful management of its cost structure. Moreover, the ongoing need for investments in product innovation, content development, and international expansion adds to the complexity of maintaining healthy margins, requiring even more careful balancing between growth initiatives and profitability targets.

Moving on, according to my estimates, when Peloton reports tomorrow, it will have ended fiscal Q1 2024 with approximately $1.7 billion of debt against $650 million of cash. Put another way, investors paying around $1.5 billion market cap for Peloton are getting about $1 billion of net debt with that.

And on top of that, the business’ aspirations are only to break even on a free cash flow basis. We are not even talking about the business being profitable.

And if all this wasn’t enough, consider this excerpt from the Peloton’s 10-K.

What you see highlighted here is that Peloton’s Term Loan carries 14.3% interest rates. That’s not 5% interest or even 8%. That’s mid-teen interest rates.

In other words, Peloton is paying around $200 million per year on its interest rates alone. For a business that’s not profitable, that’s simply untenable.

The Bottom Line

In conclusion, Peloton’s fiscal Q1 2024 earnings outlook appears precarious, marked by a challenging landscape and a vulnerable balance sheet.

The company’s ongoing struggles with profitability, coupled with the burden of escalating debt and exorbitant interest rates, pose significant obstacles to its sustained growth and financial stability.

Despite its attempts to diversify product offerings and expand into new markets, Peloton’s inability to generate consistent positive cash flow and its reliance on debt financing continue to undermine investor confidence.

As such, the stock’s future remains uncertain, and caution should be exercised before considering any significant investment in Peloton Interactive, Inc. stock.