Peloton Stock Is Beaten Down Now, but It Could 10X
Peloton's stock has plummeted from its pandemic-era highs.
Its equipment sales are slipping and it's losing paid subscribers.
But its margins are improving and it's narrowing its net losses.
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Peloton Interactive (NASDAQ: PTON), one of the hottest growth stocks during the pandemic, closed at a record high of $167.42 on Jan. 13, 2021. That marked a 477% gain from its initial public offering (IPO) price of $29 on Sept. 29, 2019, and would have turned a $1,000 investment into $5,770.
At its peak, the exercise bike maker's enterprise value reached $47.2 billion, or 12 times the revenue it would generate in fiscal 2021 (which ended in June 2021). But today, it trades at less than $7 with an enterprise value of $3.1 billion, which is just over one times this year's revenue.
Peloton initially attracted a stampede of bulls during the pandemic as gym closures and other lockdown measures drove more people to buy its connected exercise bikes and treadmills, which are tethered to streaming video classes via paid subscriptions. But it couldn't maintain that momentum after the pandemic passed and cheaper competitors entered the market. A brand-tarnishing recall, inflation, and rising interest rates exacerbated that pressure.
The company is still struggling to overcome many of those challenges, but I believe its beaten-down stock could potentially deliver a 10-bagger gain (or more) in a few years if it plays its cards right.
The bull case vs. the bear case
Peloton has been led by three CEOs in less than six years: its co-founder John Foley, who stepped down in 2022; Barry McCarthy, a former Netflix executive who left in 2024; and Peter Stern, a former Apple (NASDAQ: AAPL) executive. Foley aggressively expanded Peloton with new products and services, but McCarthy and Stern reined in those growth plans, cut costs, and focused on retaining its existing subscriptions.
The bulls believe Peloton will stabilize as it expands its stickier subscriptions, and that it's an attractive takeover target for a bigger tech company like Apple. The bears don't think it can expand its subscriptions fast enough to offset the headwinds for its lower-margin hardware business, which sells connected bikes, treadmills, and rowing machines.
Under McCarthy, Peloton reduced its equipment prices, rolled out new subscription services, hiked its subscription fees, outsourced its production to a Taiwanese manufacturer, and started selling its products on Amazon and other third-party retailers to expand its presence beyond its first-party website. It also laid off thousands of employees.
Is Peloton's turnaround working?
In fiscal 2024, Peloton's subscription revenue rose 2% to $1.71 billion, but its sales of connected fitness products fell 12% to $992 million. As a result, its total revenue dropped 4% to $2.7 billion and marked its third consecutive year of declining sales.
Its market is also still shrinking as more competitors carve up the field. For the full year, its total number of members dipped 2% to 6.4 million, its number of paid connected fitness subscribers dipped 1% to 2.98 million, and its paid app subscribers fell 26% to 0.62 million.
On the bright side, its total gross margin jumped from 33.1% to 44.7% as it reined in its previous hardware discounts and generated more revenue from its higher-margin subscriptions. It also more than halved its net loss from $1.26 billion to $552 million. As a result, its free cash flow (FCF) improved from negative $470 million in fiscal 2023 to negative $86 million in fiscal 2024.
For fiscal 2025, Peloton expects its total revenue to decline 9% to around $2.5 billion as its number of paid connected fitness and paid app subscriptions dip 7% and 12%, respectively. Yet it still expects its gross margin to rise to 50% as its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumps from $3.5 million to $350 million. Its FCF, which rose to positive $211 million in the first nine months, should also stay positive for the full year.
Why Peloton's stock could soar tenfold
Peloton faces formidable long-term challenges and hasn't proven its business is sustainable yet. But by expanding its gross margins, narrowing its losses, and strengthening its FCF, it's right-sizing its business and setting up the firm foundations for an eventual recovery.
If Peter Stern can successfully preserve Peloton's brand appeal, defend its niche, and finally gain more paid subscribers again, its revenue should rise again. If its top-line growth accelerates again, it could easily command a higher valuation -- and it wouldn't be surprising to see it eventually valued at ten times instead of one times its forward sales.
So while I'm not saying Peloton is a guaranteed 10-bagger, I don't think investors should overlook its turnaround potential.
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