PTON Stock Forecast: Sell the Stock of the Company with Negative Profitability and Poor Reputation

Yuwei ZhouThis PTON Stock Forecast article was written by Yuwei Zhou – Financial Analyst at I Know First.

Highlight:

  • PTON Stock Forecast: total revenue for Q3 FY22 dropped by 23.6% compared to that one year ago
  • Peloton drops the price on the original bike to record low
  • Customers are pulled underneath the treadmill, causing injuries
  • Z-Score is in the distress zone and implies bankruptcy possibility in the next two years
(Source: flickr.com)

Overview

Peloton Interactive, Inc. (NASDAQ: PTON) is the largest interactive fitness platform in the world with a loyal community of over 7 million Members. PTON pioneered connected technology-enabled fitness, and the streaming of immersive, instructor-led boutique classes to the members. This company makes fitness approachable while fostering social connections that encourage its members to be good versions of themselves. PTON defines a member as any individual who has a Peloton account through a paid Connected Fitness Subscription or a paid Peloton Digital subscription.

Revenue Declined With Fluctuation and Losses Increased Substantially

(Source: google.com)

PTON’s revenue is primarily generated from the sale of Connected Fitness Products and associated recurring Subscription revenue. Total revenue for Q3 FY22 was $964.3 million, vs. $1,262.3 million in Covid-impacted Q3 FY21. Connected Fitness revenue, which includes the contribution from Precor, was $594.4 million, down 42% vs Q3 last year. The primary driver of the year-over-year revenue decline was a reduction in consumer demand exiting the pandemic’s peak, partially offset by the contribution of Tread sales. Connected Fitness revenue was also negatively impacted by higher than anticipated Tread+ returns totaling $18 million related to the May 2021 product recall. Even though subscription revenue of $369.9 million grew by 55% year-over-year, the total revenue for Q3 FY22 has declined by 15.0% compared to the last quarter and dropped by 23.6% compared to that one year ago.

Furthermore, the total earnings of PTON are negative for the last 3 years. This year, the loss is suddenly larger—$(2.83) billion, which is almost 15 times that of last year. Net loss for Q3 was $(757.1) million, versus $(8.6) million in the year-ago period. Adjusted EBITDA for the quarter was $(194.0) million, versus $63.2 million in the year-ago period. The primary drivers of the year-over-year decline were lower revenue and Connected Fitness gross margins, as well as higher operating expenses.

(Unit: million dollars)

Products Can Be Repaired But Reputations Cannot

According to the US Consumer Product Safety Commission, Peloton Interactive Inc. is still working on a fix for its high-end treadmill that was recalled last year and is extending the refund window for current users. The model, called the Tread+, was pulled off the market in May 2021 following reports that children, pets, and adults had been pulled underneath the treadmill, causing injuries. In at least one case, a child died. Peloton’s cheaper treadmill, the Tread, was also recalled last year. In that case, there were at least 18 incidents of its touch screen loosening and six reports of it falling off. This quality scandal caused the company’s share price to plummet, but what was even more fatal was the subsequent slump in sales.

Peloton drops price on the original bike to record low in Amazon this October. Maybe PTON hoped to promote sales by reducing prices, however, the prospective revenue for 4Q continued to drop. In other words, the reduced price leads to a continuous decrease in revenue, so that PTON expected Adjusted EBITDA of approximately $(120) million to $(115) million in Q4.

PTON Stock Forecast: Mired in a Financial Crisis

The company is not only having sales problems, but also financial problems. According to Gurufocus, the Equity-to-Asset ratio of PTON is 0.15, which is Ranked worse than 84.25% of 832 companies in the Travel & Leisure industry. The Debt-to-EBITDA ratio is -0.91, which is Ranked worse than 100.00% of 526 companies in the same industry. Furthermore, Piotroski F-Score is 2 out of 9, which is very low and usually means poor business operation. Altman Z-Score is -1.78 (as of today), which is in the distress zone and implies bankruptcy possibility in the next two years.

Not only the financial strength, but the profitability rank is also in a crisis. As the chart shows below, the profitability of TER is very poor compared with the whole industry. The gross margin of PTON is 19.47%, which is almost half of the industry median. The ROE of -177.27% and ROA of -61.94% are significantly lower than the industry median, which means PTON is in extremely bad operating condition.

(Source: gurufocus.com)

Next, let’s take YETI Holdings, Inc. (YETI), Acushnet Holdings Corp. (GOLF), and Topgolf Callaway Brands Corp. (MODG) as comparable companies to evaluate PTON’s valuation. These four companies are on the same track and have almost the same market cap. PTON has a higher P/B ratio than average, while the other three have much healthier financial conditions. This is also a negative signal on PTON’s stock price.

(Source: gurufocus.com)

PTON Stock Forecast: Conclusion

I take a sell-side on PTON’s stock. The company is struggling in a financial crisis and there is no evidence proving that the management has found an effective strategy to deal with it. At the same time, although the stock price has fallen tremendously, I reckon the downward trend will continue, due to poor profitability.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the PTON stock forecast. The light red for the short-term forecasts is a mild bear market, while the darker red is a strong decline signal for the one-year forecast.

Past Success with PTON Stock Forecast

I Know First has been bearish on the PTON stock forecast in the past. On September 4, 2022, the I Know First algorithm issued a forecast for PTON stock price and recommended PTON as one of the best stocks to go short. The AI-driven PTON stock prediction was successful on a 3-months time horizon resulting in more than 28.32%.

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Please note-for trading decisions use the most recent forecast.