Shares of Peloton Interactive, Inc. (NASDAQ: PTON) fell sharply on December 9 and 10 (about 16% in aggregate) due it seems to an unflattering depiction of the company and its fitness machines in a fictional U.S. cable TV series on the evening of December 8. Typically, such an overreaction would create a buying opportunity in a stock, but in this case, Peloton’s valuation still looks extended given the sentiment shift toward gym visits in favor of home workouts taking place in the U.S. fitness industry. In simple terms and despite the risks of the still-raging pandemic, people are apparently bored working out at home.
According to the brokerage firm Jefferies, gym visits in early October were down only 8% from the same pre-pandemic time period in the fall of 2019. Such an attitude stands in sharp contrast to conditions present in 2020. For example, in the spring of last year the fitness training firm OriGym reported that such search terms as “home workout, home gym equipment, and bodyweight exercise” showed 500%-600% increases.
More tangibly, Planet Fitness, Inc. (NYSE: PLNT), a global fitness center chain with 2,200 gyms located primarily in the U.S., reported in early November that its 3Q 2021 revenues increased 46% versus the year-ago period. Furthermore, Planet Fitness’ CEO, Christopher Rondeau, reported that its current membership total of more than 15 million represents 97% of its all-time pre-pandemic peak. Peloton’s own statistics seem to corroborate this: the number of Peloton Connected Fitness quarterly workouts fell nearly 20% to 120,515 in the quarter ended September 30, 2021 from the period ended March 31, 2021.
Perhaps even more concerning, the percentage change in retail sales of home fitness equipment may have recently passed a key negative inflection point. The market research firm NPD Group reports that retail sales of home fitness equipment rose 20% in the first eight months of 2021 versus the same period in 2020, but fell 5% in the narrower three-month stretch ended August 31, 2021 compared with the three months ended August 31, 2020. Indeed, The Wall Street Journal reports that the waiting time for a Peleton exercise bicycle to be delivered is back to the normal pre-pandemic range of one to three weeks, down from a peak of 10+ weeks. The total U.S. market for home fitness equipment was around US$3.7 billion in 2020.
Peloton’s US$12.5 billion enterprise value equates to about 2.7x its projected FY 2022 revenues. (Fiscal 2022 ends September 30, 2022.) The company cut the midpoint of its FY 2022 revenue guidance to US$4.6 billion from US$5.4 billion in early November. During prior periods, and before the guidance cut, that 2.7x revenue multiple would seem attractive.
|(in millions of US $, except for shares outstanding)||FY22 Guidance||2Q FY22 Guidance||Last 12 Months||1Q FY22||4Q FY21|
|Operating Cash Flow||($612.8)||($61.0)||($599.0)|
|Debt, including Conv. Debt||$1,635.0||$1,512.1|
|Shares Outstanding (Millions)||302.8||300.1|
|Connected Fitness Subscriptions||3,400,000||2,825,000||2,492,000||2,331,000|
|Connected Fitness Quarterly Workouts||120,515||134,334|
However, if the company 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 only 13% revenue growth from the US$4.07 billion revenue realized over the 12 months ended September 30, 2021. Attaching a 2.7x revenue multiple to such a diminished growth rate may be too high of a figure.
Equally difficult is predicting how the stock market should value the company’s projected cash flow deficits now that growth is slowing. Peloton’s adjusted EBITDA loss is US$98.7 million for the twelve months ended September 30, 2021. This shortfall is now expected to be 4.5 times this figure 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.
Changing attitudes by workout enthusiasts are pressuring Peloton. Data showing clear evidence of members returning to their local gyms could signal that achieving recently lowered FY 2022 revenue may be difficult. Even after declining by around 70% over the last five months, Peloton shares do not seem cheap based on projected near-term revenue or cash flow.
Peloton Interactive, Inc. last traded at US$40.72 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.