Why It’s Time to Walk Away From Peloton Interactive Stock

Making an investment in Peloton Interactive (NASDAQ:PTON) made sense when the Covid-19 pandemic first struck and home exercise equipment was in high demand. And indeed, PTON stock holders profited handsomely in 2020.

Peloton (PTON stock) sign on city storefront

Source: JHVEPhoto / Shutterstock.com

However, that was then, and this is now.

Just because Peloton was a darling of the market last year, doesn’t mean that it’s a sensible investment in late 2021. As the stay-at-home trade shifts into the recovery trade, selling pricey home workout machines isn’t necessarily the ideal business model.

Besides, as we’ll see, safety issues could put a dent in Peloton’s reputation. On top of that, there are major points of concern in the company’s fiscal data.

All in all, investors might want to look elsewhere as the risk-to-reward profile just isn’t favorable with Peloton right now.

PTON Stock at a Glance

Price is what you pay, but value is what you get. That’s (loosely) a quote attributed to the one and only Warren Buffett.

It’s meant to emphasize that just because you can buy something at a low price, doesn’t necessarily mean that it’s a bargain worth buying.

PTON stock provides an excellent example of this principle in action. It has declined steeply, from $145 at the beginning of 2021 to $82 in early October — but is there value here?

I hate to be the bearer of bad news, but folks who’ve been holding the bag since January might not achieve break-even anytime soon with Peloton.

The company’s earnings, which will be a major theme of this article, aren’t positive. And, over the long term, PTON stock will reflect Peloton’s fiscal position.

On a trailing 12-month basis, Peloton’s earnings-per-share is negative 64 cents. Until that number improves, it’s going to be difficult to recommend an investment in this company.

Let’s Recall the Recalls

Before reviewing the financial stats, it’s important to take note of the tragic incidents that cast a dark shadow over Peloton Interactive.

The first highly publicized incident of 2021 occurred in February. As reported by the United States Consumer Product Safety Commission, a three-year-old boy was trapped under a Peloton Tread Plus, and ended up having significant brain injury.

“He was found to have tread marks on his back matching the slats of the treadmill, neck injury, and petechiae on his face, presumably from occlusion of blood flow,” the report stated.

Then, in March, a young child (different from the one discussed above) was killed in an accident involving a Tread Plus treadmill.

In response to this and to more than 70 reported incidents, Peloton initiated a recall of the company’s Peloton Tread+ treadmill, model number TR01.

Consumers can contact Peloton for a full refund until November 6, 2022. In other words, the financial damage could persist for the next year. As for the reputational damage, it’s likely to continue for much longer than that.

Reaching a Fiscal Cliff

It’s one thing for a company to generate top-line revenues. Translating them into bottom-line profits is another matter entirely.

In Peloton’s case, we already mentioned that the company has been operating at a negative per-share earnings position over the preceding 12 months.

With that in mind, let’s drill down to the fiscal figures. For the fiscal year ended June 30, 2021, Peloton generated revenues slightly exceeding $4 billion. That’s a sizable improvement over the roughly $1.8 billion generated in the fiscal year ended June 30, 2020.

However, there’s an issue when it comes to the company’s expenditures. During 2021’s fourth fiscal quarter, Peloton’s total operating expenses grew 179.4% year-over-year.

Moreover, in the fiscal year ended June 30, 2021, Peloton posted a net loss of $189 million. This is much worse than the net loss of $71.6 million recorded for the fiscal year ended June 30, 2020.

The point is, if Peloton Interactive can’t reduce its capital outlays, the company could be headed for a fiscal cliff despite its ability to generate revenues.

The Takeaway

PTON stock serves as a stark example of the difference between price and value.

At the same time, Peloton Interactive shows us that strong revenues don’t always result in a positive earnings profile.

In addition, the company’s reputational damage will likely persist for a long time.

Therefore, an investment in Peloton, even at a relatively low price, just isn’t worth pursuing.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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