Peloton Interactive (NASDAQ: PTON) is falling back into the good graces of the investment community. The company is steadily improving its finances, which is reducing risk. And it helps Peloton inch closer to creating a sustainable business model, something that was certainly called into question over the past few years.
It still trades at 94% off its peak, but shares have skyrocketed 213% since their 52-week low made in May 2024. Can this consumer discretionary stock keep the momentum going and double between now and 2030? Here's what investors need to know.
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Better financial shape
For the three-month period that ended Dec. 31, 2024, which was Peloton's fiscal 2025 second quarter, the company was able to cut its net loss by more than half to $92 million from $195 million in the year-ago period. This was despite overall revenue declining 9% year over year.
Credit goes to management's increased focus on right-sizing the cost structure. The business cut its operating expenses by 25% in the second quarter, with a notable reduction in sales and marketing. Unsurprisingly, this will lead to lower net losses.
Peloton is also improving its balance sheet. As of Dec. 31, 2024, it had $670 million in net debt on its books. This was 30% lower than at the end of calendar year 2023. However, it's worth pointing out that interest expense totaled $35 million in the second quarter, which represented more than 10% of gross profit.
Despite cutting operating expenses and reducing net losses, as well as trimming the debt load, Peloton still hasn't proved it can be consistently profitable. This might be a deal-breaker for investors who want to own companies that aren't operating in the red.
Show me the growth
Management can't continue cutting costs indefinitely. For the stock to double by 2030, the business needs to return to growth. This has been a challenge to say the least. Second-quarter sales of $674 million were 47% below the peak in the third quarter of fiscal 2021.
After the pandemic boom that saw tremendous demand, the company hasn't driven the same sort of excitement from consumers. Blame inflationary pressures, higher interest rates, or more people returning to gyms, but Peloton is facing a new reality.
Even in what has otherwise been a solid economic backdrop, the company's base of connected fitness subscribers keeps declining. That's not a good sign. It's proof of just how difficult it is to encourage consumers to spend a huge sum of money on a piece of exercise equipment that they might end up not using that much.
For what it's worth, the leadership team is currently focused on continuing to strengthen the company's finances. Capital expenditures in the last six months totaled just $2.5 million, or a paltry 0.2% of revenue. Once things have stabilized, then I'm sure executives will start to prioritize growth more aggressively.
Wall Street isn't optimistic. According to consensus analyst estimates, revenue is projected to fall 8% between fiscal 2024 and fiscal 2027.
Hitting a double
Investors hoping for a double will be pleased to know that the stock trades at a price-to-sales ratio (P/S) of 1.4, which is 67% below the historical average. This cheap valuation adds upside, since any fundamental improvements can lead to better market sentiment. But this remains a very risky investment.
Let's assume Peloton's P/S multiple expands by 50% over the next five years to 2.1. This doesn't seem completely out of the question if executives continue to make financial improvements and get to profitability under generally accepted accounting principles (GAAP). However, this implies that revenue would need to grow 50% by 2030 for the stock to rise 100%, resulting in a doubling of investor capital.
I'm not optimistic this favorable outcome can happen. Peloton is struggling to grow its hardware sales and subscriber base. And there is no reason to believe the situation will change anytime soon.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Peloton Interactive. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
