Peloton Stock Down 27% in May – Time to Buy PTON Stock?

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The price of Peloton stock has gone down nearly 27% so far this month as supply chain bottlenecks, negative sentiment toward risky assets, and other negative catalysts continue to weigh on the valuation of this growth stock.

Just yesterday, the stock of the New York-based fitness company experienced a 9% decline following the release of its financial results covering the third quarter of the 2022 fiscal year after Peloton reported wider than expected losses while revenues fell more than Wall Street had estimated.

During the three months ended on 31 March, Peloton reported total revenues of $964.3 million resulting in a 24% drop compared to the same period a year ago with product revenue declining 42% during that period to $594.4 million while subscription revenues surged 55% at $369.9 million. The consensus estimate from analysts for the period stood at $971 million.

Gross profit margins on Peloton’s products swung to negative territory during this quarter as well with the company losing 11.4% out of each $100 of products sold. Meanwhile, the number of members who have signed up for the app rose 29% compared to Q3 2021 at 7 million but net additions to the firm’s subscription program declined 53% to 195,000 compared to the number added a year ago.

Moreover, the average monthly number of workouts in which users participated declined 28% to 18.8 meaning that the platform’s usage is declining as well, possibly as subscribers are now spending less time at home compared to previous years back when the virus situation discouraged people from going outside frequently.

Peloton’s Chief Executive, Barry McCarthy, commented on several issues the company is currently struggling with including elevated inventory levels that are weighing on the firm’s cash-flow generation capacity, negative growth in certain key performance indicators, and supply chain challenges.

In regards to these challenges, McCarthy outlined several plans the company is implementing to turn things around including an $800 million cost savings program, the appointment of Andrew Rendich as Chief Supply Chain Officer, and multiple initiatives that aim to accelerate the company’s growth down the road including an expansion to international markets.

Even though the management’s tone was positive in regards to the future, Peloton still produced a huge net loss of $757.1 million resulting in a significant deterioration of its bottom-line performance compared to the $8.6 million the firm shed during the same period a year ago.

The firm reported a fully diluted EPS of minus $2.27 compared to the minus $0.03 it reported the previous year. This figure significantly exceeded the market’s consensus estimate of minus $0.88 for the period.

Moreover, during the third quarter of the 2022 fiscal year, Peloton reported $746.7 million in negative free cash flows compared to minus $204 million it reported in Q3 2021. The company reported total cash and equivalents of $879.3 million.

What could be expected from this gym stock after this latest quarterly report? In this article, we will be assessing the price action and fundamentals of Peloton stock to outline plausible scenarios for the future.

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Peloton Stock – Technical Analysis

peloton stock
Peloton (PTON) price chart – 1-day candles with multiple indicators – Source: TradingView

Peloton stock has declined 64% so far this year as the company’s struggles have been getting worse, especially now that macroeconomic conditions appear to be deteriorating faster than the market initially expected.

In this regard, the company’s woes on the inventory management and financing front are increasing the risk of insolvency for Peloton.

As highlighted in the chart above, Peloton remains on a clear downtrend as the price action has been unable to make a higher high since January last year at least while PTON is trading 90% below its 52-week high of $129.7 per share and 77% below its 200-day simple moving average.

As a result of yesterday’s sharp downtick, the Relative Strength Index (RSI) has drifted to oversold territory and remains on a downtrend. Meanwhile, the MACD remains negative as well and below the signal line.

The company’s dire fundamental situation and overly negative technical readings are favoring a short-term bearish outlook as Peloton just posted a fresh all-time low. At this point, nothing is preventing the stock from falling further in the next few weeks.

Peloton Stock – Fundamental Analysis

From a fundamental perspective, there are multiple things to be concerned about in regards to Peloton’s prospects. First of all, inventory climbed to $1.41 billion during the previous quarter resulting in a build-up of almost $500 million compared to a year ago.

Moreover, the firm’s negative free cash flow increased significantly to over $700 million while the firm accumulates a drain of $1.95 billion in the first nine months of the 2022 fiscal year.

Cash reserves at this point don’t seem to be enough to sustain the firm for longer than two quarters and Peloton’s ability to secure additional financing could be challenging in this current environment as risk premiums continue to rise amid changes in macroeconomic conditions.

Moreover, the products segment, which accounts for over 60% of the firm’s total revenue at the moment, is producing negative gross profits, meaning that the cash drain will not be stopping any time soon.

Even though the CEO claims that the inventory will not become obsolete, even if it is sold at some point in the near future, these sales will still produce losses for the firm and the company will still have to replenish it at a loss and that makes the whole business model unsustainable at this point.

With this in mind, the outlook for the firm from a fundamental perspective looks quite challenging and that makes Peloton stock a rather unattractive investment in an environment plagued with macro risks.

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About Alejandro Arrieche PRO INVESTOR

Alejandro is a freelance financial analyst with 7 years of experience in the industry. He writes technical content about economics, finance, investments, and real estate and have also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing, macro analysis, and technical analysis. Other publications Alejandro has written for include The Modest Wallet, and Capital.com.