Shares of Peloton (PTON) went public almost five years ago, pricing its initial public offering (IPO) at $29 per share. The stock touched an all-time high of $167 in January 2021 as the exercise equipment company enjoyed robust demand amid the COVID-19 pandemic.
Today, priced at $4.56, Peloton is a beaten-down penny stock that trades 97% below all-time highs.
Let’s see if investing in this penny stock at the current valuation makes sense.
Peloton Gains Big After Fiscal Q4 Results
Shares of Peloton rallied 35% on Aug. 22 following the company’s earnings result for fiscal Q4 of 2024, ended in June, as it reported top-line growth for the first time in nine quarters and boosted profit margins. For the June quarter, Peloton reported revenue of $644 million and a loss of $0.08 per share. Comparatively, Wall Street forecast revenue at $631 million with a loss per share of $0.17.
Peloton’s cost-cutting efforts allowed it to narrow losses from $241.1 million to $30.5 million in the last 12 months. While its sales rose just 0.2% year over year, Peloton increased its revenue in a historically weak quarter.
In Q4, Peloton’s connected fitness hardware revenue was down 4%, while subscription revenue rose 2.3%. While hardware sales remain under pressure, Peloton is growing subscription sales due to the secondary market, where customers can purchase bikes at a much lower cost. The secondary market includes sales channels that are not owned by Peloton, such as the Facebook Marketplace (META) and Craigslist. In fact, subscription sales from hardware bought in the secondary market rose 16% year over year in Q4.
A Focus on Cost-Cutting
In the last two years, Peloton has focused on lowering its costs to offset weak demand amid a challenging macro backdrop. In early 2024, it announced a restructuring plan, reducing its global workforce by 15% to generate $200 million in annualized cost savings through fiscal 2025.
In its fiscal Q4, Peloton reported a positive adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) and free cash flow for the second consecutive quarter. Its Q4 EBITDA of $70 million surpassed estimates of $53 million and rose from just $6 million in the March quarter. Its free cash flow of $26 million was notable compared to a cash outflow of $74 million in the same period last year.
These improvements can be tied to Peloton’s debt refinancing process, as it wrestled with a liquidity crunch before staging a turnaround.
What's Next for the Penny Stock?
Peloton emphasized that it would continue to invest in its hardware and subscription software to enhance user engagement and overall experience. However, it warned that these efforts are unlikely to translate to subscriber growth in the next year, which suggests the company is sacrificing growth for profitability.
Peloton’s workforce reduction drove its sales and marketing spending lower, an expense that was unsustainably high during COVID-19. In fiscal Q4, Peloton reduced sales and marketing spending by 19% year over year.
In the September quarter, Peloton forecast sales between $560 million and $580 million, significantly lower than consensus estimates of $609 million. However, its EBITDA forecast between $50 million and $60 million surpassed estimates of $45 million. In fiscal 2025, Peloton expects sales between $2.4 billion and $2.5 billion, again lower than estimates of $2.7 billion.
What's the Target Price for PTON Stock?
Out of the 20 analysts covering Peloton stock, two recommend “strong buy,” 16 recommend “hold,” one recommends “moderate sell,” and one recommends “strong sell.”
The average price target for PTON stock is $5.41, indicating an upside potential of 17.6%.
Currently, Peloton is a high-risk investment due to its weak profit margins and sluggish sales numbers. Market participants will likely want to see the company significantly shore up its profit margins before investing in this penny stock.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
