Anecdotal Evidence Points to Continued Downside Risk for Peloton Interactive

Occasionally, a company is beset by a stream of negative news that never seems to stop. The integrated fitness company, Peloton Interactive, Inc. (NASDAQ: PTON)appears to be boxed into that situation now. The shares have lost ~55% of their value in less than two months; nevertheless, the stock market is still ascribing an enterprise value (EV) to Peloton of about US$12.8 billion. That valuation still appears too high.

A few days ago, the brokerage firm UBS reported that the adoption levels for Peloton’s digital app on Apple’s iOS platform, or operating system, has declined 0.7% since October. Such a decline is inconsistent with Peloton’s December 2021 quarter (2Q FY2022) guidance that its Connected Fitness Subscriptions will total 2.8 to 2.85 million as of December 31, 2021, up ~13% from 2.49 million as of September 30, 2021. 

As such, the company’s 2Q FY22 results could fall short of its financial guidance of US$1.1 billion to US$1.2 billion in revenue, and an EBITDA loss of US$325 million to US$350 million.

(in millions of US $, except for shares outstanding)FY22 Guidance2Q FY22 GuidanceLast 12 Months1Q FY224Q FY21
Revenue$4,600 $1,150 $4,069.2 $805.2 $936.9 
Operating Income    ($616.3)($359.7)($301.7)
Adjusted EBITDA($450)($338)($98.7)($233.7)($45.1)
Operating Cash Flow  ($612.8)($61.0)($599.0)
Cash/Marketable Securities – Period End $924.2 $1,606.8 
Debt, including Conv. Debt – Period End $1,635.0 $1,512.1 
Shares Outstanding (Millions)  302.8300.1
Connected Fitness Subscriptions3,400,0002,825,0002,492,0002,331,000
Connected Fitness Quarterly Workouts120,515134,334
NOTE: FY22 guidance shows midpoint of guidance range.

 In addition, the much talked-about sentiment shift among workout enthusiasts toward gym visits versus home workouts seems more tangible every day. According to CNN, the number of people seeking to sell their Peloton fitness equipment on the resale marketplace OfferUp has increased 77% over April 2021 through December 2021 compared with the same period a year ago. By contrast, the number of consumers hoping to buy a Peloton machine on the resale site from April 2021 through December 2021 was up only 25% year over year.

An even more pronounced comparison is taking place on the Mercari resale marketplace. In the January 2021 through December 2021 period, that platform has experienced a 1,300%+ year-over-year explosion in the number of sales listings of Peloton-branded items, including exercise machines and related equipment.

Contrast the current environment with Peloton’s lofty position among journalists, analysts and investors almost exactly one year ago. According to a Forbes article dated December 28, 2020, “Peloton flat out won the pandemic … if there is such a thing. Sure, luck was a little bit on Peloton’s side, but sometimes it is better to be lucky than good, and those that understand luck also know that the lucky tend to make their own. Peloton won the pandemic because it smartly and strategically positioned itself to win going into the whole darn thing.”  

If Peloton were to meet the US$4.6 billion midpoint of its FY 2022 revenue estimate (which seems far from certain given the points noted above), that would imply it trades at about a 2.8x ratio of its EV-to-projected revenue for the year ending June 30, 2022. That multiple does not seem especially conservative.

More problematic is how investors should value Peloton’s projected cash flow deficits now that growth may be slowing even more than the company noted in early November. Peloton’s adjusted EBITDA loss was US$98.7 million for the twelve months ended September 30, 2021. This shortfall is expected to be 4.5 times this figure (according to early November management guidance) for the twelve-month period ending June 30, 2022.

It is of course possible that investors will in time decide that Peloton’s growth slowdown is short term in nature and that the company deserves to trade nearer to prior, more buoyant valuation multiples. Also, about 10% of the company’s float was shorted as of November 30, 2021 (according to Yahoo Finance), potentially prompting Reddit-inspired investors to decide that Peloton is a meme stock.

Recent pieces of anecdotal evidence suggest that the projections made in early November by Peloton may be optimistic. Even though Peloton stock has lost three quarters of its value since year-end 2020, it still looks expensive on both revenue and cash flow projections.

Peloton Interactive, Inc. last traded at US$36.71 on the NASDAQ.

Information for this briefing was found via Edgar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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