Interactive fitness platform operator Peloton Interactive, Inc. (PTON) in New York City provides connected, technology-enabled fitness and streams immersive, instructor-led boutique classes to its customers. The company also offers a portfolio of connected fitness products and related accessories. Shares of the fitness equipment have plunged 82.9% in price over the past year and 78.6% over the past six months because investors are shifting away from so-called pandemic trade. Furthermore, because the COVID-19 omicron variant is deemed less severe than previous variants, more countries are gradually easing their pandemic-related restrictions, which could further slow PTON’s pandemic- induced sales boom.

The stock’s sell-off was further fueled by its CEO’s comment that the company is reviewing the size of its workforce and “resetting” production levels. However, the CEO later clarified that the company is not halting its production but is instead planning to adjust production levels and improve its cost structure.

The stock has slumped 31% in price over the past month to close its last trading session at $27.06, which is below its IPO price. At-home fitness trends are losing momentum as more consumers head back to gyms. “With the ongoing economic reopening and rising logistics costs presenting obvious near-term headwinds, we believe Peloton is likely to take a few quarters to get back on its feet,” according to analysts at Truist Securities. Truist has downgraded the stock and lowered its price target on PTON shares. In addition, many other analysts have reduced their price targets on the stock lately.

Here is what could shape PTON’s performance in the near term:

Bleak Financials

PTON’s total revenue increased 6.2% year-over-year to $805.20 million in its fiscal first quarter, ended September 30. But its sales of connected fitness products declined 16.7% to $501 million. Also, its gross profit declined 20.1% from the prior-year quarter to $262.70 million. Its income from operations came in at a negative $359.70 million, compared to its $68.90 million year-ago value. The company’s net income declined 642.6% year-over-year to a negative $376 million, while its EPS declined 725% year-over-year to a negative $1.25.

PTON Slashes Forecast

“We anticipated fiscal 2022 would be a very challenging year to forecast, given unusual year-ago comparisons, demand uncertainty amidst re-opening economies, and widely-reported supply chain constraints and commodity cost pressures,” said Chief Executive Officer John Foley.

PTON now expects its connected fitness subscribers to stand between 3.35 million and 3.45 million, down from an earlier target of 3.63 million. And its revenue is expected to range between $4.40 billion - $4.80 billion, down from a prior outlook of $5.40 billion.

Poor Profitability

The company reported faster-than-expected declining traffic on its website over the past few months and lower foot traffic at its brick-and-mortar stores. Furthermore, the company had to cut the price of its original Bike product by 20% last year to attract customers. Although the PTON witnessed accelerated sales, the results failed to meet PTON’s expectations. The company’s gross margins declined to 12% from 39.4% a year earlier in its most recent quarter.

Also, PTON’s negative 11.20% and negative 31.08% respective EBITDA and levered FCF margins are substantially lower than the 2.74% and 5.78% industry averages.

Moreover, PTON’s negative 38.35%, 14.37%, and 11.89% respective ROE, ROA, and ROTC, compare with the 17.16%, 5.82%, and 7.54% industry averages.

Although the company has been reviewing its cost structure lately, it might take some time to become profitable. PTON expects to be adjusted EBITDA profitable by fiscal 2023.

Current Valuation does not Justify Its Fundamentals

In terms of forward EV/Sales, PTON is currently trading at 2.27x, which is 76.2% higher than the 1.29x industry average. Also, its 2.10 forward Price/Sales ratio is 93.6% higher than the 1.08 industry average. PTON’s 4.80x forward Price/Book is 61.4% higher than the 2.89x industry average.

POWR Ratings Reflect This Bleak Prospects

PTON has an overall F rating, which translates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has an F grade for Quality, which is consistent with its negative profit margins.

PTON has a D grade for Value. Its stretched valuations justify this grade.

Of the 65 stocks in the D-rated Consumer Goods industry, PTON is ranked #64.

Beyond what I have stated above, one can also view PTON’s grades for Sentiment, Growth, Momentum, and Stability here.

View the top-rated stocks in the Consumer Goods industry here.

Bottom Line

PTON has benefited from heightened demand for its products and services during the pandemic. However, the company has cut its near-term outlook, citing uncertainty in consumer demand. Analysts expect its EPS to decline 811.1% in the quarter ended December 2021 and 633.3% in the current quarter. Furthermore, its EPS is expected to decline 60.8% per annum over the next five years. Nevertheless, the growing competition in the at-home fitness space could make it difficult for PTON to hold on to significant market share. Thus, considering PTON’s bleak underlying fundamentals, we think the stock is best avoided now.

How Does Peloton Interactive, Inc. (PTON) Stack Up Against its Peers?

While PTON has an overall POWR Rating of F, one might want to consider investing in the following Consumer Goods stocks with an A (Strong Buy) rating: Mannatech, Incorporated (MTEX), Société BIC SA (BICEY), and Ennis, Inc. (EBF).

PTON shares fell $0.44 (-1.63%) in premarket trading Monday. Year-to-date, PTON has declined -24.33%, versus a -7.79% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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