Peloton Remains A Very Risky Stock

Justin Paget

Since our previous article connected Peloton (NASDAQ:PTON) nan shares person mislaid complete 73% of their value, compared to almost 12% mislaid by S&P 500 successful nan aforesaid clip frame.

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John Foley, nan company's laminitis and long-time CEO, was replaced by Barry McCarthy successful February 2022, who came retired of status aft a profession astatine Netflix (NFLX) and Spotify (SPOT) and whose occupation was to move Peloton around.

During McCarthy's clip successful nan agency Peloton has reversed galore its initiatives from anterior years. During nan COVID-19 pandemic nan institution knowledgeable a immense surge successful request for its products, however, it suffered higher costs from proviso concatenation issues. To mitigate that, Peloton's guidance (still Foley astatine that time) decided to put successful its ain manufacturing accommodation by buying gym instrumentality shaper Precor and building its ain factories successful Taiwan and Ohio. Fast guardant 1 year later and Peloton's guidance made a determination to outsource its instrumentality production. Now Peloton is connected nan marketplace trying to waste their manufacturing accommodation astatine nan correct price.

The caller CEO besides initiated respective rounds of layoffs successful an effort to trim costs, pinch nan past being announced successful October 2022. Peloton's workforce was reduced from 6,700 successful June 2021 to around 3,800 aft nan cuts. During its latest net telephone McCarthy promised that nan October information was nan past and location won't beryllium much coming.

During McCarthy's tenure Peloton has opened caller avenues for customers to get its products including done Amazon, Dick's aliases renting nan equipment. The second is portion of nan strategy "Fitness arsenic a Service" - FaaS. During its latest net telephone nan institution disclosed that location were astir 28,000 FaaS customers. While it's not moreover 1% of Peloton's customer base, company's guidance is rather optimistic astir nan caller customer segment, arsenic it allows nan institution to grow its TAM. This conception is besides little profitable, arsenic nan customers are not paying for nan instrumentality upfront and nutrient higher churn rates of astir 4%. However, Peloton's guidance is assured that nan institution still generates 1.4x successful LTV compared to CAC.

Peloton's Financial Performance

Peloton stopped publishing maturation charts successful its quarterly earnings, arsenic there's nary maturation to show. The company's revenues person declined 11% to $3.6bn successful FY22 and are expected to stay level successful FY23 ending astatine nan extremity of June. Analysts' expectations are moreover little astatine $2.75bn successful revenues successful FY23.

Peloton's caller CEO utilized 2022 arsenic a humor bath and nan institution revenge $2.8bn successful nett nonaccomplishment successful FY22 ($8.15 nonaccomplishment per share), retired of which complete a cardinal were restructuring, impairment and colony charges, which are not expected to repetition successful FY23. However, moreover excluding those, Peloton has spent $2bn connected SG&A and trading expenses successful FY22, while earning only $700m successful gross profit. Therefore, nan institution urgently needs to execute costs savings successful its operating expenses and successful nan champion lawsuit to trim them by half to $1bn per year. McCarthy is alert of that and plans to reside these issues next. However, nan institution has not published immoderate guidance connected nan target costs savings rate.

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In January 2023 Peloton hired Leslie Berland, erstwhile Twitter executive, arsenic Chief Marketing Officer (CMO). Berland will oversee complete $1bn successful yearly trading fund and will hopefully usage trading dollars sparingly.

Peloton is presently not expected to present affirmative net per stock for nan years to come, which is simply a captious rumor if you look astatine Peloton's equilibrium sheet.

Peloton's Balance Sheet Looks Terrible

Since nan opening of 2022 Peloton has written disconnected astir $500m successful intangible assets, PP&A and goodwill. Another $300m were written disconnected successful inventories. These impairments, coupled pinch operating losses, virtually wiped retired Peloton's equity, which successful Dec 2022 stood astatine meagre $30.5m. As nan institution is burning done astir $300m successful rate per quarter, Peloton urgently needs to either raise further equity aliases waste their assets astatine a premium to its book worth frankincense realising a book gain. During its latest convention call, Peloton's guidance confirmed its plans to waste their Ohio mill by nan extremity of June. However, successful our opinion, Peloton needs equity correct now.

Peloton already had to spell to nan marketplace to raise equity nether little than perfect circumstances successful November 2021. At that clip nan institution had to waste equity astatine $46, a discount to nan marketplace value astatine that time. At nan existent marketplace value level, Peloton would person to earnestly dilute its existing shareholders to raise immoderate meaningful magnitude successful equity.

In position of cash, nan institution still had $871m astatine nan extremity of Dec 2022, which could suffice for a mates of quarters astatine nan existent pain rate. Again, nan waste of manufacturing accommodation could supply nan basal injection, however, Peloton should find a measurement to mitigate its rate burn. Otherwise nan institution will tally retired of tricks to support itself afloat.

Peloton's DCF Valuation Update

Revenues: We expect Peloton to present single-digit maturation going guardant arsenic nan institution needs to execute a balancing enactment betwixt its trading walk and growth. We kept nan terminal maturation complaint astatine 2% and expect nan institution to scope $5bn successful income successful 10 years' time.

Gross Profit margin: As nan institution increases nan number of its subscribers, we expect Peloton to beryllium capable to execute 42% gross profit margin.

EBIT margin: Our basal presumption is that nan institution manages to trim its operating expenses and limit them to $1bn p.a. going forward. In this lawsuit 20% EBIT separator should beryllium attainable. In comparison, Planet Fitness (PLNT) consistently delivers 27% operating margin. This presumption is besides not excessively eager compared to nan manufacture averages. However, Peloton still has to beryllium that it's capable to execute profitability.

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WACC: We summation our WACC to 9.4% successful statement pinch accrued risk-free complaint of 3.77%, equity-risk premium of 4.89% and PTON's beta of 1.96x.

Probability of Failure: We person added a 30% probability of nonaccomplishment to Peloton's valuation. In this lawsuit nan proceeds would magnitude only to 50% of company's book worth of equity and indebtedness aliases $1.2bn.

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Target Price: As a result, our DCF suggests a target adjacent worth of PTON shares astatine $9, aliases 30% downside to nan existent stock price. Without nan discount for nan insolvency risk, PTON's estimated adjacent stock worth would beryllium astir $16/share.

Relative Valuation: PTON is still trading astatine $5bn marketplace headdress aliases 1.4x P/Sales. If you return analysts' estimates for FY23, past nan institution is trading moreover astatine 1.8x P/Sales. This by nary intends is inexpensive for a institution pinch a monolithic quarterly rate burn, which is connected nan brink of insolvency.

Conclusion

As Peloton is struggling for its existence, PTON remains a very risky banal for investors. The adjacent mates of quarters will beryllium to beryllium captious for nan company. Peloton will either find a measurement for a break-even maturation aliases will tally retired of rate and equity and will fundamentally beryllium up for sale. As nan estimated adjacent worth oscillates betwixt $9 and $16/share, a risky investor mightiness effort astatine taking a stance.