Women wearing Peloton apparel
Source: Peloton Facebook

Peloton Stock Turnaround Is Still Possible, Options Are Thin

Anuradha Garg - Author
By

May 11 2022, Published 8:45 a.m. ET

Peloton stock fell to a new record low of $12.9 on May 10, as it released a disappointing fiscal third-quarter loss. The company has been in a deep crisis and its share price decline of nearly 80 percent in the last year reflects that. Not only did the company miss earnings estimates, it also cut the sales guidance. The overall tone of the call was somber with its CEO Barry McCarthy stating "turnarounds are hard work." With this as the background, investors are now concerned about whether Peloton stock will recover.

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PTON stock has been on a steady decline as the COVID-19 pandemic has somewhat abated and people have been going back to their pre-pandemic fitness routines. The company and the stock became pandemic darlings as people got used to working out from home due to stay-at-home orders. At the time, the growth was relentless, which encouraged investors to assign PTON stock ambitious valuations. In hindsight, the consistent demand increase expectation by the company and by investors was clearly an over assumption.

How will Peloton survive the downturn?

What's the company doing differently now to survive this steep downturn? Well, for starters, there was a huge shake-up at the top management level in February and thousands of employees were laid off. The new CEO at the helm is trying to turn around the company but even he's surprised by the magnitude of the company’s problems.

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peloton work from home
Source: Peloton Facebook

To tide over its short-to-medium term financial needs, Peloton has signed a binding letter with JP Morgan and Goldman Sachs to borrow $750 million in a five-year deal. At $879 million in cash and cash equivalents at the end of the March quarter, the company is “thinly capitalized” as stated by the CEO himself. The company has a lot of unsold inventory, which results in liquidity headwinds. The company expects to change the headwinds to tailwinds by fiscal 2023.

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Peloton aims for 100 million subscribers.

The company is aiming for 100 million subscribers eventually from 7 million currently. Peloton plans to achieve the goal through global expansion and promoting its Peloton app, which hasn’t gotten much attention until now. While this could be one of the low-hanging fruits for the company, it's running out of time as it keeps bleeding money.

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M&A might be one of the few options available for the stock turnaround.

McCarthy has maintained that he isn't pursuing a sale of the company but he acknowledged that there are other options on the table. The company might dish out a minority stake of 15 percent–20 percent. Amazon and Nike are seen as potential candidates for a buyout of the stake. A stake sale could be one of the few options available to the company to shore up much-needed cash in an effort at the turnaround.

Currently, analysts are almost equally divided between “buy” and “hold” for the company with 16 analysts recommending a “buy,” 14 recommending a “hold,” and one recommending a “sell,” according to Market Beat. Analysts’ consensus target price is $55.28, which reflects a whopping upside of 328 percent in the stock price. While most of these ratings were from before the company’s latest results were released, many analysts are still optimistic about a possible turnaround.

While the options available to the company for a turnaround might be thin, they could still help the company and the stock recover. They will have to do more than cost-cutting and layoffs to salvage the company.

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