Peloton Interactive (NASDAQ:PTON), the fitness company that gathered widespread interest during the pandemic while people were locked inside and looking for exercise, made lots of noise on Wall Street this week.
Investors flocked to the stock on Monday, sending shares soaring as high as 25% on speculation that the company could be the acquisition target of a major tech giant like Amazon (NASDAQ:AMZN) or Apple (NASDAQ:AAPL), or other large companies like Sony Group (NYSE:SONY), The Walt Disney Company (NYSE:DIS) or Nike (NYSE:NKE).
Peloton investor Blackwells Capital, which owns less than 5% of the company, recently sent a letter to Peloton’s board suggesting a sale in light of the company’s production struggles, a safety recall, flagging demand and the stock’s 79% fall since its 52-week high on Feb. 16, 2021.
On Monday, the stock closed just above its Sept. 26, 2019, IPO price of $29 per share. But then on Tuesday shares rebounded, soaring as much as 30% as the company announced major changes, as well as its financial results for its second quarter (more on those in a moment).
McCarthy is known for advocating for Spotify’s direct listing instead of an initial public offering to go public. He also served for more than 10 years as the CFO at Netflix, helping take the company public as well as transition from video rentals to online streaming.
The company also said it would cut 2,800 corporate jobs, or roughly 20% of its corporate workforce, while keeping its instructors and content creators. It will also cut back on its delivery teams and its warehouse footprint, including the company’s plans for its $400 million factory, Peloton Output Park, in Ohio. Peloton also said it will trim about $800 million in annual costs and cut capital expenditures by about $150 million in 2022.
Peloton is adding two new directors to its board as well. Angel Mendez, who leads a private artificial intelligence (AI) company, and Jonathan Mildenhall, the former chief marketing officer of Airbnb (NASDAQ:ABNB).
Now, in regard to Peloton’s second-quarter results, there wasn’t good here either, as the company missed analysts’ expectations on the top and bottom lines.
For the second quarter in fiscal year 2021, Peloton reported an earnings loss of $1.22 per share, which was 33% below Wall Street’s expectations for a loss of 92 cents per share, as well as the 21 cents per share the company earned a year prior.
Revenue of $1.13 billion was about 6% higher than a year ago but fell below analysts’ expectations for $1.15 billion by 1.5%. Particularly disappointing was the revenue figure for its connected fitness segment, which dropped 8% from a year ago to $796.4 million.
The company also revised downward its fiscal 2022 revenue range from $3.7 billion to $3.8 billion, from $4.4 billion to $4.8 billion. It also expects to have three million connected fitness subscribers in fiscal 2022, down from its prior forecast of 3.35 million to 3.45 million.
“We are taking steps to best position Peloton for sustainable growth, while also establishing a clear path to consistent profitability,” the former CEO Foley told shareholders.
So, now that the company is attempting a big turnaround, is it a fundamentally superior stock and a good buy right now?
Let’s see how the company stacks up in my Portfolio Grader.
As you can see, the stock earns a Total Grade of “F,” Quantitative Grade of “F” representing institutional buying pressure under the stock, and a Fundamental Grade of “F.”
In fact, the stock has earned an overall “F” in my Portfolio Grader since October 2021.
While the stock did rally post-earnings, the reality is its fundamentals are weak and institutional buying pressure is dwindling. So, I don’t believe the strength has any real staying power.
The fact of the matter is the companies that do have strong staying power are those that post strong earnings results and issue positive guidance.
This holds true for my Growth Investor companies. My average Growth Investor stock is characterized by 33.4% annual sales growth and 45.6% annual earnings growth. I should add that the analyst community has revised their consensus earnings estimates 12.1% higher in the past three months. And you know what that means: They should bounce like “fresh tennis balls” when they announce better-than-expected fourth-quarter results in the upcoming weeks.
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The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Amazon.com, Inc. (AMZN), The Walt Disney Company (DIS), Nike, Inc. (NKE)