Peloton Interactive (NASDAQ: PTON) provides interactive fitness products and operates an at-home fitness platform for live and on-demand indoor cycling classes. PTON stock has had a bumpy ride as of late.
Its shares have a one year return of -78% and a year to date return of -24%. We could justify the year-to-date return as 2022 started with concerns about rising interest rates and high inflation, but this combined with recent geopolitical risks amid Russia and Ukraine have shifted investor sentiment from risk-on to risk-off mode. Therefore, the yearly return hides a lot of important signals. When a stock crashes throughout one year there are certain factors that are material in revealing core business weaknesses.
What are these weak business and financial aspects that investors should know about this connected-fitness manufacturer now?
Management Changes: A lot of Things Need to Get Fixed
When a public company makes changes to its management investors are concerned for two reasons. First, why the changes were not made earlier especially when financial performance has already been poor? And second, how soon will the new management will deliver astonishing results or simply raise the standards in the business?
The firm changed its CEO, added two members to the board, and a longtime director stepped down. Investors should give some time to the newly appointed CEO to navigate the firm through muddy waters to more clear ones.
Peloton has also announced very important changes and a program that every troubled company eventually should implement, the sooner the better. The program has four core concepts, reduce costs, support growth and lead to profitability and free cash flow.
Peloton is not reinventing the wheel with this decision. It just teases its shareholder’s patience. Think for a while you are a captain of a ship, and you see a huge iceberg appearing on the horizon. Your actions should start immediately if your course leads to a collision with the iceberg. Large commercial ships need time to steer effectively so a slow reaction could be a catastrophic one.
The good news is that Peloton decided, even with a lot of delays as I will mention shortly in the financial performance section, to make changes and radical ones. Procrastination went on for too long.
The firm expects at least $800 million in annual run-rate cost savings, will reduce its capital expenditures in 2022 by nearly $150 million to improve “the economics of its hardware business” and achieve operational efficiency implementing a workforce reduction by approximately 20%.
Buyout Rumors: Who Was Behind Them?
Rumors that Amazon (NASDAQ:AMZN) and NIKE (NYSE:NKE) were among the interested companies to acquire Peloton created a short-term rally for PTON stock that ended when finally Peloton’s management denied these rumors.
Getting a troubled fitness company at a low price is not a bad idea but what if you could buy it at an even lower price monitoring how the restructuring plan will unfold?
Investing in Cyclicality
Peloton is in the Consumer Cyclical sector. The word of importance here “cyclicality.” But not just about business cycles and economic conditions like economic theory but the return to normal living conditions amid the pandemic.
Peloton stock gained a lot during the trend of stay-at-home stocks. With not just the U.S, but the whole world was poised to reopen it would be natural interest in at-home fitness to diminish. There are also product issues and a lot of stiff competition. In the end, the party for these stay-at-home stocks ended.
But is it not that all trends end at some point, and new ones begin?
Financial Performance: Q2 FY 2022 Highlights
Revenue of $1,133.9 million, grew 6% year-over-year, gross profit showed a 34% year-over-year decline, total operating expenses grew 93% year-over-year and net loss for the second quarter was $439.4 million versus net income of $63.6 million in the same period last year. In summary Peloton, in Q2 FY 2022 did everything related to financial performance the worst possible way.
The silver lining is that Peloton ended Q2 with $1.6 billion in cash and cash equivalents. There is still a huge red flag, free cash flow of only $521.8 million in Q2 FY 2022. This showed that the firm has less than a year of cash runway based on its current free cash flow.
A solution could be a stock offering announcement, which would be bad for the valuation, but probably needed for the survival of the business. Shareholders have been diluted in the past year, with total shares outstanding growing by 12.6%.
Bottom Line on PTON Stock
These financials do not inspire, on the contrary, they’re worrisome.
However, give some time to the new management to apply the restructuring plan and avoid the stock for now. Going short is risky after such an intense selloff, and going long does not make sense from a valuation and financial performance perspective.
On the date of publication, Stavros Georgiadis, CFA did not have (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.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.