Peloton Price Target as Business Is Clearly Dying
Here's why I'm adding to the fitness firm on weakness.
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Current "Stocks Under $10" name Peloton Interactive PTON released the firm's fiscal third quarter financial results on Thursday morning. The stock almost immediately gave up a rough 15% in pre-opening trade as the business continued to dwindle. I bought more for the Sarge-folio, despite the fact that even now, the stock is trading nicely above net basis. This is that story.
For the three-month period ended March 31, Peloton posted a GAAP EPS of -$0.12 on revenue of $624 million. The bottom-line print missed expectations by six cents per share, while revenue generation contracted a nasty looking 13.1% year over year. That said, that top-line number still bested consensus view. While performance is clearly still in decline, the firm executed at a better-than-expected level or on the upper end of the expected range across several metrics in addition to sales, including ending paid connected fitness subscriptions, gross margin and adjusted EBITDA.
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Operations
As revenue contracted 13.1% to $624 million, the cost of that revenue dropped 25% to $306 million. This left a gross profit of $318.1 million (+2.7%) as gross margin improved from 43.2% all the way to 51%. Total operating expenses decreased by 23.1% to $350.5 million. That produced an operating income/loss of -$32.4 million, up from the year-ago comparison of -$146.2 million. Adjusted EBITDA increased from $5.8 million to $89.4 million.
After accounting for interest and taxes and other income/expenses, GAAP net income landed at -$47.7 million, down from -$167.3 million for the year-ago comp. This works out to an EPS of -$0.12, down from -$0.45. The firm also suffered $15.8 million in losses related to foreign currency exchange rates.
User Metrics
- Members: Dropped 8% to 6.1 million
- Ending Paid Connected Fitness Subscriptions: Dropped 6% to 2.88 million
- Average Net monthly Paid Connected Fitness Churn: Held steady at 1.2%
- Ending Paid Subscriptions: Dropped 15% to 573,000
- Average Monthly Paid Subscription Churn: Dropped 90 BPS to 8.1%
Fundamentals
Despite the declining sales, Peloton generated operating cash flow of $96.7 million. Out of that number came capex spending of $2.1 million, leaving free cash flow of $94.7 million (math may not work due to rounding), which was up from $8.6 million a year ago. Obviously, the firm is in no position to return capital to shareholders.
Looking at the balance sheet, Peloton ended the quarter with a cash position of $914.3 million, inventories of $213.5 million and current assets of $1.34 billion. Cash is up sharply over the past nine months. Inventories are down sharply over that same period. Current liabilities add up to $811.7 million, including short-term debt of $208.2 million and deferred revenue of $156.4 million.
Those numbers leave the firm's current and quick ratios at 1.65 and 1.39, respectively. Adjusted for deferred revenues, these already healthy ratios rise to 2.05 and 1.72. Peloton, for all of its troubles, can easily meet the firm's short- to medium-term obligations.
Total assets amount to $2.065 billion, including just $49 million worth of goodwill and other intangibles. Total liabilities less equity comes to $2.556 billion, including $1.291 billion in long-term debt (both in convertible senior notes and in term loans). Obviously, the size of this debt load will eventually be problematic, which is why it is crucial that the firm maintain positive free cash flow.
Guidance
For the current fiscal year in full, Peloton is now projecting a 7% decline in Ending paid Connected Fitness Subscriptions, which is improved slightly from previous guidance. The firm also sees a 12% decrease in Ending Paid App Subscriptions, which is a downward revision from previously issued guidance.
Full-year revenue guidance is being taken up a notch to $2.455 billion to $2.47 billion, up slightly at the midpoint. Adjusted EBITDA is now seen at $330 million to $350 million, up $15 million at the midpoint, and free cash flow is projected at $250 million, which includes the expected negative impact of tariffs.
My Thoughts
Obviously, this is a business that continues to die. That said, margin is improving as the firm becomes more efficient, the current portion of the balance sheet is surprisingly strong. On top of that, free cash flows are not just improving but getting to the point where a serious attempt can be made to make a dent in the debt-load. It is at that point when the firm can perhaps become an attractive dance partner for larger fitness firms looking to expand their consumer-facing portfolios.
This is the falling-wedge pattern that I showed readers in mid-April. We can see that the breakout from this pattern has worked like a charm, though the stock never approached the $8.25 target price that I had laid out for you.
I have added to my long position in this name this morning as the 50-day SMA came under attack from above. This business is in decay, but I don't see the stock as a lost cause. The fundamentals are those of a much healthier company.
Relative strength has fallen to "neutral" but the daily MACD remains bullish, with all three components in positive territory and the 12-day EMA still above the 26-day EMA.
Peloton Interactive (PTON)
Target Price: $8.25 (reiteration)
Pivot: 200-day SMA (currently $6.70)
Add: Right here at the 50-day SMA
Panic: On a new post April 21 low
At the time of publication, Guilfoyle was long PTON equity.
