It’s been an incredibly tough year for small and mid-cap stocks that have nothing to do with AI, but perhaps one of the more challenged companies this year is Peloton.
The exercise bike maker continues to grapple with weaker demand following a temporary pandemic-era surge, leading to multiple rounds of layoffs and leadership changes.
Plummeting Stock Value
Year to date, shares of Peloton have dropped nearly 40%. This significant decline reflects investor concerns about the company’s long-term viability and the challenges it faces in stabilizing its business.
Despite the bleak outlook, there are some positive aspects worth noting for Peloton, particularly for investors considering a shorter-term flip.
Key Developments Since February
Several important developments have occurred since February, when Peloton’s stock was still trading in the low $4 range. These include the company’s fiscal Q3 (March quarter) earnings release, a completed refinancing, and a change in CEO.
While Peloton has faced substantial criticism from investors over the past few years, a balanced look at the company reveals potential opportunities amid the turmoil.
Major Refinancing Deal
One of the significant updates is Peloton’s recent major refinancing deal. Liquidity has been a major concern for investors as the company dealt with the fallout from lower demand. In late May, Peloton announced a substantial refinancing to bolster its liquidity.
The refinancing consisted of $1.35 billion in drawn cash, $1 billion from a 5-year term loan, and $350 million from a convertible debt note due in 2029. This long maturity provides Peloton with breathing room to attempt to reignite growth across its product lines.
Additionally, the company secured a new $100 million undrawn revolving credit facility to further enhance liquidity and bought back $800 million of its existing convertible debt at a discount.
Revenue Growth Avenues
Peloton has several avenues for revenue growth, including:
Relaunch of Tread+
In Q3, the company relaunched its Tread+ product line, the higher-end version of the Tread product that hadn’t seen a refresh in three years. This relaunch is expected to drive renewed interest and sales.
Growth in Rentals
The rental/lease model is gaining traction as more consumers prefer to rent rather than spend thousands of dollars upfront on a Peloton machine. In Q3, rental revenue increased by 10% year-over-year. Notably, rental buyouts, where customers decide to purchase their Peloton after renting it, exceeded expectations.
This trend is particularly positive as it increases accessibility and offers a “try before you buy” option.
Hyatt Deal
Last month, Peloton announced it was placing its devices in 800 Hyatt hotels. All these hotels will feature the Peloton Bike, and some will also offer the Peloton Row.
This deal opens the door for additional large-scale outfitting at chain gyms, hotels, and other establishments, potentially expanding Peloton’s market reach.
Acquisition Speculation
While it is risky to base an entire company’s positive outlook on acquisition rumors, private equity buyout speculation in May has provided some support for Peloton’s share price. This speculation may continue to act as a floor for the stock.
Challenges and Risks
Despite these positives, Peloton faces significant risks. Membership trends remain challenging, though there was a slight sequential increase in Connected Fitness subscribers.
The company ended its most recent quarter with 3.06 million Connected Fitness subscribers, up 52,000 sequentially from Q2. However, churn, especially for App+ memberships after price increases, continues to be a concern.
In its Q3 shareholder letter, Peloton lowered its full-year expectations for memberships, citing softer trends. The company adjusted its forecast for Ending Paid Connected Fitness Subscriptions by 30,000 at the guidance midpoint to 2.97 million.
Similarly, it reduced its outlook for Ending Paid App Subscriptions by 150,000 to 605,000. This adjustment reflects lower gross additions and a cautious approach to App media spending.
The resulting impact on full-year revenue is a reduction of $25 million, or 1% of annual revenue. While this may seem minor, paid subscription memberships are crucial for Peloton’s future, especially as rental demand grows.
Operational Shifts
Operationally, Peloton is in a state of flux with the exit of CEO Barry McCarthy in May after only two years. His departure coincides with a major layoff of 15% of the workforce, covering 400 positions, and expected to generate $200 million in annual operational expense savings.
While continuity may be disrupted, this move aims to make Peloton a leaner, more efficient company.
Several Potential Opportunites
With Peloton, it’s essential to consider both the positives and negatives. The company’s growth prospects, particularly in its Rentals business and increased enterprise adoption, present potential opportunities.
While a long-term hold may not be advisable, there is value in the company’s short-term catalysts that could appeal to active traders.
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