Peloton (PTON), which was a $50 billion market cap company at its peak in early 2021, is now a small-cap name with a market cap of just over $1.5 billion. It's also a penny stock, and trades below the $5 threshold. The shares of the connected fitness equipment company fell to a record low of $2.70 last week after its fiscal Q3 2024 earnings report.
Peloton also announced a leadership transition, and Barry McCarthy – the former Netflix (NFLX) and Spotify (SPOT) executive who took over as CEO from cofounder John Foley in February 2022 - stepped down.
The stock rebounded from its record lows last week amid reports that it is an acquisition target for private equity companies. In the past, there was also speculation that Big Tech companies, and especially Apple (AAPL), could be interested in buying Peloton. The speculation wasn’t totally baseless, as healthcare has become a battlefield for tech giants, given it's one industry that is still in the early days of digital transformation.
As for Peloton, is the company a worthy acquisition target, or will the company go bankrupt, as some seem to be speculating? We’ll discuss in this article, beginning with a broad overview of the business and the most recent earnings.
Pelton’s Turnaround Remains a Work in Progress
Peloton’s story is not very different from the many former “stay-at-home” winners whose sales blossomed during the pandemic, and are now either growing at a much slower pace - or worse, as is the case with Peloton, falling.
For instance, in the fiscal Q3 of 2024, Peloton reported revenues of $717.7 million, which was 4.2% lower YoY and significantly below the $1.26 billion that it reported in the corresponding quarter in the fiscal year 2021. If not for the healthy growth in subscription revenues, which have surpassed product sales for the last four quarters, the performance would have looked even bleaker.
In his over two-year tenure as CEO, McCarthy took several measures to turn around Peloton. The company changed its business strategy and gave up its manufacturing ambitions in a bid to cut down on fixed costs. It outsourced last-mile delivery and shut down many physical stores, while partnering with multiple third parties like Amazon (AMZN) and Dick’s Sporting Goods (DKS) to sell its products.
It also stated selling refurbished bikes and offering fitness equipment on rent. While these measures helped, they were simply not enough, as is illustrated in PTON’s price action.
PTON’s Guidance Spooked Investors
While Peloton turned free cash flow positive in fiscal Q3 – quite an achievement, considering the turmoil – its Q4 guidance spooked investors. The company expects connected fitness subscribers to fall in the current quarter, which would mark the first quarterly decline in its subscriber count if that forecast holds up.
The paid app subscription count – those users who don’t have Peloton equipment and only use its app – has also been falling. The metric peaked at almost 1 million in fiscal year 2022, and has since dwindled to 674,000. The company expects that number to fall to 605,000 at the midpoint in the current quarter.
Another factor spooking investors is the upcoming maturities of Peloton’s term loan, for which it said that it is “working closely” with lenders as well as its financial advisors. It also has a convertible debt that’s set to mature in 2026.
I believe fears over a Peloton bankruptcy appear a bit overstretched, as a large chunk of its debt is the convertible note. The company has also turned free cash flow positive, which should help in deleveraging the balance sheet.
Peloton Stock Forecast
Wall Street analysts have been bearish on Peloton stock for quite some time now, and the pessimism only increased following its fiscal Q3 earnings. PTON has a consensus rating of “Hold,” and only 3 of the 21 analysts covering the stock rate it as a “Buy” or higher. The stock’s mean target price of $5.23 is 24% higher than Friday’s closing price.
Is PTON an Acquisition Target?
I believe Peloton is an attractive acquisition target both for other companies as well as private equity firms. The company’s subscription business generates healthy gross margins, and association with a leading brand like Apple or Nike (NKE) – which was also said to be looking at Peloton in the past – might be a win-win strategy.
As for the recent spike in Peloton stock following reports of an acquisition, the gains might diffuse in the coming days if we don’t get more updates. That said, while penny stocks are a risky proposition, Peloton is one name that I won't give up on – at least for now.
On the date of publication, Mohit Oberoi had a position in: AAPL , NKE , PTON , AMZN . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
