Peloton Stock Sinks after Bearish Morgan Stanley Note

Peloton stock (NYSE: PTON) stock fell over 11% yesterday and had its worst day since October after Morgan Stanley issued a bearish note on the stock. While the stock has rebounded from its 2022 lows it is still a fraction of its all-time highs.

Citing data from Similarweb, Morgan Stanley analyst Lauren Schenk said Peloton’s web traffic fell 27% YoY in the first third quarter.

She added, “Although web traffic is still above pre-COVID levels, the 2-y/y trends have continued to deteriorate, failing to find the stability needed for a return to growth, in our view.”

Schenk maintained her equal weight rating on PTON stock with a target price of $4.5 and said “It is increasingly unclear where new, highly profitable demand could come from.”

Morgan Stanley issues bearish note on Peloton

In the fiscal second quarter that ended in December, Peloton reported revenues of $792.7 million which were 30.1% lower YoY. However, the company’s gross profits improved to $238 million in the quarter.

While the company’s hardware sales were strong in the quarter due to seasonal factors, for the third consecutive quarter, its subscription sales were higher than product sales.

Commenting on the sales, Peloton’s CEO Barry McCarthy said “This trend is gross margin accretive because subscription gross margins significantly exceed hardware gross margins. If this trend continues, which seems likely since we sell more hardware in Q2 than any other quarter of the fiscal year, it represents a structural shift toward improving GM’s (gross margins) in the business.”

PTON’s cash burn rate has come down

The company’s cash burn was $94 million in the quarter – significantly below the $747 million in the corresponding quarter last year. Also, the company said that if not for the payments that it made to vendors for parts that it no longer needed, the company would have posted positive free cash flows of $8 million.

Notably, the company is targeting sustainable positive free cash flows from the next fiscal year. The company has taken several decisions to lower its cash burn and has laid off over half of its employees and shut down some stores.

It has also stopped manufacturing the equipment and shifted to third-party manufacturing. It also moved the last-mile delivery to a third party in a bid to lower its fixed cost base. In the shareholder letter, it said that it has reduced its annualized run rate expenses by $830 million over the last year.

Peloton is looking to sell the Ohio factory

Peloton is looking to sell its Ohio manufacturing facility to raise cash. However, during the earnings call in February, it said that the deal’s closing has been delayed by six months.

It was also looking to sell Precor which it had acquired in 2021. However, it said that it has put off the deal as the price was much lower than what it thinks the business is worth.

It added, “We maximize the value of our Precor investment by running Precor like a free-
standing business, capitalizing on its core strengths, and leveraging the value it provides to owner-operators across the fitness industry.”

Peloton has also partnered with Amazon and Dick’s Sporting Goods to sell its products, a departure from its previous strategy of selling products through its stores and e-commerce platform.

PTON on its business priorities

McCarthy has completed one year as PTON’s CEO and has been working to transform the business. For his second year as the CEO, he listed several priorities that include returning the company to YoY growth.

Notably, Peloton’s revenue growth has been negative for the last many quarters as the demand for its equipment tumbled as the economies reopened.

PTON’s stock price best captures its sagging fortunes. The stock jumped 430% in 2020 amid the rally in so-called stay-at-home shares. However, the stock plummeted 76% in 2021 and another 78% last year. The entire stay-at-home pack has seen a selling spree over the last year. However, we’ve seen some recovery this year and Peloton has also gained around 28% YTD.

McCarthy listed reaching sustained positive adjusted EBITDA as the second priority and said that the company would work towards restoring international growth.

Peloton turnaround

Meanwhile, on multiple occasions, McCarthy has said that corporate turnarounds are easier said than done. The market is somewhat divided on the company’s turnaround. While Morgan Stanley is not bullish, JPMorgan sees it as a turnaround candidate.