hapabapa
Shares of Peloton Interactive, Inc. (NASDAQ:PTON) have come to life alongside a big rally in many beaten down and typically high-beta names. The momentum was enforced by quarterly results which pleased investors, given the circumstances, warranting an update to the situation.
In November, I concluded that still no acceleration was seen following the release of the quarterly results, even as EBITDA came in stronger than expected. The fabricated EBITDA numbers were highly adjusted, still translating into large realistic losses. Amidst a rapid increase in net debt and losses increasing on a sequential basis, I was quite cautious.
A Base
Peloton was a $20 stock ahead of the pandemic, as the pandemic created the perfect operating conditions for the firm, as investors were en masse piling into the shares as well, with shares peaking at around $150 early in 2021.
The company doubled sales in 2020 to $1.8 billion, and despite the great top line sales momentum, an $80 million operating loss was reported for the year. After posting strong growth in 2021, and the company guiding for further revenue growth in 2022. In fact, the company initially saw sales come in around $5.4 billion, although expected to arrive with some margin pressure.
That guidance was quickly thrown out of the window as the company posted second quarter sales at just $1.14 billion, with revenues falling to $964 million in the second quarter and to just $679 million in the third quarter.
Last summer the company guided for first quarter sales of just $625-$650 million, accompanied by an EBITDA loss of $90-$115 million, which would mark quite a sequential improvement. As it turned out, a $616 million revenue number looked soft, yet a $33 million EBITDA loss surprised towards the upside.
The issue is that the list and size of reconciliations was huge, with operating losses posted at $374 million, as losses still surpassed $200 million if one excludes for restructuring and impairment charges. With net debt up to $744 million leverage gradually became an issue, or at least a concern as well.
While second quarter sales were set to recover to $700-$725 million, an expected EBITDA loss of $100-$115 million was hardly inspiring, as this observation simply made me very cautious at around $8 per share.
2023 – Booming So Far
With shares of Peloton Interactive, Inc. starting the year 2023 around the $8 mark, shares traded at the $12 mark ahead of the quarterly earnings release, as the stronger performance meant that shares rallied to $16 at this point in time, with shares having doubled since the start of the year.
Second quarter results were released on the first day of February. Total revenues of $793 million were still down 30% year-over-year, but up 29% on a sequential basis. Actual product revenues of $381 million were down 52% year-over-year, with gross profits coming in at a negative $43 million amount. Subscription revenues rose 22% on an annual basis to $411 million, while these activities posted gross margins around 70%, but these revenues were dead flat on a sequential basis.
Overall gross profits of $235 million on the reported revenue base look better than it is as the company still posted a net loss of $335 million on the back of a $122 million negative EBITDA number, being worse than initially guided for.
For the current third quarter, Peloton sees revenues between $690 and $715 million, with adjusted EBITDA losses seen between $35 and $50 million, indicating that hopefully some modest improvements in the cost base should be expected. Net debt has risen to $812 million, albeit that a big chunk of debt is in the form of convertible notes.
Continued dilution makes that there are now 342 million shares outstanding, supporting a $5.5 billion equity valuation at $16 per share, as net debt is increasing a bit as well.
Looking at the actual results and the outlook, I fear that the Peloton share price move has more to do with momentum and short-covering, rather than actual solid quarterly results, or a very good outlook for the third quarter.
Hence, I am cautious given the move seen in Peloton Interactive, Inc. shares, although I have no intent to hold a short position here given the risks of short-covering and momentum.
The reality is that a current >$6 billion enterprise valuation simply feels too rich, as Peloton Interactive, Inc. is still posting substantial losses, net debt continues to rise, and the business is still a long way from even moving towards profitability, let alone profitability which can carry the amount of net debt being taken on. While the bike might be interesting to use, I continue to shy away from the Peloton Interactive, Inc. shares here.
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