The rise and fall of Peloton Interactive Inc. (NASDAQ: PTON) could easily become one on of the top case studies for business school graduates. It went from a “what to do to grow” ahead of its IPO to an “exactly what not to do” story during and after the pandemic. But after a 50% surge the week of August 23, 2024, many turnaround and low-price stock investors and speculators have to be wondering if they should jump back in or not.
Oggonomics evaluates many situations like this when they come up. Whether or not investors should see this as a “strategic buy” or a “strategic sell” or a “strategic avoid” has to be a decision for each investor and their financial advisors. The view of Oggonomics is that Peloton remains a “Strategic avoid.” That’s not investment advice at all. Just the view here.
Peloton’s earnings report is still awaiting a leader after its CEO departure. It is still a cost-cutting story. Revenue is not growing here, and a plan to get revenue growth remains in the “trust us” phrase (or maybe the “pray for us” phase). While revenue may have jumped a whopping 0.2%, Peloton expects revenues to decline 4% in the coming quarter and expects a 9% decline for its fiscal year. Not exactly a great turnaround. And selling in-home health subscriptions in a GLP-1 world may be harder than ever when consumers already feel financially squeezed from inflation.
STOCK TRADING METRICS
With a 52-week range of $2.7 to $7.24, Pelton’s $3.35 share price ahead of its report might make a $4.84 closing price on Friday still seem cheap. And then compare it to the $100+ and $150+ stock prices of 2020 and 2021 when the entire world was doing everything from home. Gyms all across America and elsewhere were either ghost towns or were closed.
Prior to the prior week’s news flow and trading flurry, Peloton was averaging about 11 million or 12 million shares on an average day. It traded 135 million shares last Thursday (to $4.55 from $3.36) and 80 million shares (to $4.84 from $4.55) on Friday.
The reality is that low-priced stocks under $5 and $10 per share tend to attract much higher share volume on big news days than stocks with prices of $100 and higher. It’s just the law of small numbers.
The NASDAQ: Short Interest had been shown as follows based on closing dates:
- 07/31/2024 69,479,077
- 07/15/2024 73,139,792
- 06/28/2024 68,027,596
- 06/14/2024 67,979,379
- 05/31/2024 68,754,039
- 05/15/2024 45,231,309
THE ANALYST BRIGADE
There is much more beyond just the financial metrics to consider. JPMorgan’s Douglas Anmuth had been a longstanding “bull” here on Peloton, Maintaining an Overweight rating for some time. But after a 40% pop, Anmuth downgraded Peloton to Neutral. He also cut his prior $7 price target down to $5 on the stock. One issue cited is economic and secular headwinds as consumers are feeling strapped.
As of the time of this writing, only Roth MKM and Oppenheimer had the equivalent of “Buy” ratings. 15 or so other firms have cautious to neutral ratings.
BMO Capital Markets analyst Simeon Siegel left the door open for significant upside ahead if this is the beginning of great news. He also referred to it as fearing “a melting ice cube” if it is not.
Elsewhere…
TD Cowen maintained its Hold rating but raised its price target to $4.00 from $3.00.
Bernstein kept its Market Perform rating and raised its price target to $4.25 from $3.80.
Morgan Stanley maintained its Equal-Weight” rating while raising its price target to $3.50 from $2.50.
Telsey Advisory maintained its Market Perform rating but raised its target to $5 from $4 in that call.
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BEWARE CONVICTION BIAS
Investors who remain negative on a certain story (or the market) forever can miss out on great investments. Maybe they are just for trades, but they can also miss great turnarounds. Peloton has a lot to prove before anyone is going to say the great turnaround is upon us.
And here is a personal admission of “conviction bias” — One thing that was always impossible to get over personally was a trainer calling Peloton out as a “stationary Huffy with a computer on it.” In all fairness and to be objective, Peloton has come far from that stigma with multiple products and tiers of service.
FINANCIALS
Peloton had $697.6 million in cash and cash equivalents as of June 30, 2024. It also had total debt of $2.078 billion, with a net debt of $802.5 million and a tangible book value of -$575.3 million. There doesn’t seem to be any great asset play here.
IS THERE A WHITE KNIGHT IN WAITING?
Peloton has been discussed as a takeover candidate before, but a $1.8 billion market cap is still going to be enough to scare many corporate managers and boards away. Many shareholders could accuse them of a breach of fiduciary duties for throwing money away. Then again, a large corporate giant that might be able to present an integration plan into instant earnings might be able to convince their shareholders that acquiring Peloton is worth the risk.
IN THE END…
If you already own the stock, you are on your own. The view of Oggonomics is that Peloton remains in the “avoid” category. That’s not a “buy” nor is it a “Sell” or “Short Sell” view. And short selling stocks down over 90% from their highs can be a painful experience even if your fundamental thesis proves to be correct.
Again, this is simply just a view rather than investment advice. Oggonomics does not issue formal investment recommendations. Any decisions made to buy, sell, hold and/or avoid need to be made with a financial advisor.
