Peloton Interactive Stock: Speculative, At Best (NASDAQ:PTON)

Peloton (NASDAQ:PTON) has been one of the poster children of the pandemic-induced momentum run. Just a $20 stock ahead of the pandemic, shares rallied to the $160 mark by year-end of 2020, only to give up nearly all gained ground and trade at $35 late in 2021.

It was in the final days of 2021 when I last looked at the prospects for Peloton as I concluded that investors were breaking hard. Even as shares were down 80% from the highs in 2020, I failed to see imminent appeal given the detrimental performance and still very elevated valuations.

Quick Recap

After going public in September 2019, the perfect conditions for Peloton emerged in the spring of 2020 as the world was grappling with the pandemic. With fitness outlets closed, the company became really popular with users and investors, who were wildly enthusiastic on the hardware sales combined with subscription-based revenues, the holy grail of the zeitgeist at the time.

In September 2020, the company posted 2020 results with revenues doubling to $1.8 billion, and despite the spectacular growth, the company still posted a GAAP loss of $80 million that year. The company guided for another year of strong growth with revenues for 2021 seen around $3.6 billion, on which EBITDA was seen at $200-$275 million. While that looked positive, note that the company “generated” $118 million in EBITDA in 2020, which translated into large losses on the bottom line.

So even in these great operating conditions, the company was not yet able to become profitable, even as the company hiked the guidance to $3.9 billion in sales and EBITDA of $300 million following the first quarter results, and to more than $4 billion in sales alongside the release of the second quarter results.

With shares peaking at $160, a $50 billion valuation was huge given the fundamental performance as shares fell back to the $100 mark in spring of 2021 as consumer product safety claims arose. In the autumn, full year sales came in at $4.0 billion, yet EBITDA of $254 million fell short of expectations at the end of the year, as this resulted in a large loss, but shares still held ground around the $100 mark.

A $5.4 billion revenue guidance for 2022 looked solid, but an EBITDA loss of $325 million marked nearly $600 million deleverage from 2021, a true shocker. This is certainly the case as first quarter revenues were seen at just $800 million, with EBITDA losses seen at $285 million, most likely implying some sequential improvements during the year.

In November, first quarter sales were in line with expectations as a $234 million EBITDA loss was slightly better than guided for, but still worked down to an operating loss of $360 million, or $4 million per calendar day! The company furthermore trimmed the full year guidance, now seeing sales at just $4.6 billion as EBITDA losses were seen increasing to $50 million.

Given this backdrop, a $10 billion valuation late in 2021 looked still very rich with operating losses trending at nearly a billion per annum, all while the operating conditions were still quite rosy, with the pandemic still being very much around. Furthermore, the company has taken on a lot of additional costs during the boom, including a new headquarters and manufacturing facilities, making me still very cautious, as these costs could not easily be cut.

Caution Wins The Day

In February of this year, Peloton posted second quarter results and while revenues were up 6% on the year before to $1.14 billion, that was about the good news. The company posted an EBITDA loss of $266 million and on the bottom line a GAAP loss of $439 million. These are still dismal results, but with the company in full transition, it is interesting to look forward.

While third quarter sales are seen down a bit to a midpoint of $975 million, adjusted EBITDA is set to narrow to $125-$140 million. The full year guidance of $3.75 billion in sales and $650 million in EBITDA losses, reveals the implicit fourth quarter guidance as well. This reveals sales at just over $800 million in the fourth quarter. On the “bright” side: adjusted EBITDA losses totaled half a billion already in the first two quarters, as the outlook for reduced losses in the third quarter reveals that break-even results might be in sight in the fourth quarter. Even in that case, we first have to see the company deliver on this, as break-even EBITDA levels are far from a break-even realistic profit numbers.

The continued retreat of the pandemic and concerns about valuations in technology names made that shares fell only further. By May, shares fell to the $15 mark as third quarter sales of $964 million were more or less in line with the guidance, yet a $194 million adjusted EBITDA loss was far greater than guided for, a real worry for investors given the turnaround in which the company finds itself, as balance sheet integrity remains an issue as well.

These losses make that the net cash position has been evaporated as continued dilution increased the share count to 333 million shares, which now at $10 works down to a $3.3 billion equity valuation. Even more so, fourth quarter revenues are seen at just $675-$700 million, with adjusted EBITDA set to improve to $115-$120 million, a huge loss nonetheless, and far bigger than guided for not too long ago.

And Now?

With a market value of just over $3 billion, it is obvious that the situation is just manageable here, as the company trades around 1 times sales. The issue is that of continued and huge losses, trending around a billion a year here, while the cost-saving measures still have to kick in, all while the topline has come under greater pressure as well.

Right now, the situation remains utterly speculative as the business is undoubtedly not worth the current valuation based on the fundamental performance. On the other hand, the company has brand recognition as the space could be interesting for a large technology name to get involved and make a big entrance, but this is mere takeover speculation. The other bright news is that the company has seen quite some turnover in the executive board which might be a positive, but this still has to play out of course.

All in all, it is hard to get upbeat despite shares losing another 75% of their value from December last year, as the decline in the enterprise value has been much less pronounced amidst the continued cash burn. Given all of this, and the worse fundamental performance, I find it very hard to get upbeat here, as any position or involvement here is purely based on speculation.