Don't Buy Peloton Stock on Buyout Rumors
The Peloton Interactive (NASDAQ: PTON) delivery vans that became a common sight at the height of the pandemic are now far less prevalent, as demand for the company's pricey connected-fitness equipment plunges.
Its post-pandemic turnaround effort, led by former CEO Barry McCarthy, failed to reignite demand or successfully pivot the company to subscriptions. McCarthy stepped down earlier this month, leaving the company rudderless.
There were plenty of reasons to stay far away from Peloton stock in 2021 when the first cracks in the story were appearing. McCarthy slashed costs and grew the subscription business after taking the helm, but the brand never recovered.
Peloton's latest results paint a dire picture. Revenue was down 3% year over year in the 2024 third quarter, with product revenue down 12%. The company posted a net loss of $167 million on $717 million in revenue.
Peloton's new plan revolves around cost-cutting. The company is laying off 15% of its global workforce, reducing its retail showroom footprint, and rethinking its international strategy. There's no growth story here, just one of survival. On top of layoffs, Peloton is working on a debt refinancing plan that will push maturities back and buy it more time.
A white knight won't save Peloton shareholders
It's looking increasingly likely that Peloton isn't going to make it as a stand-alone company. The company still has nearly $800 million in cash on the books, which means there's no near-term risk of failure. But free cash flow for the nine months ending on March 31 was a loss of $112 million, and that includes a $137 million benefit from reducing inventories. Inventory reductions can't go on forever.
Rumors emerged earlier this month that private equity firms are considering a buyout. While some sort of buyout looks like the most likely path for Peloton, either by private equity or a larger company looking to scoop up the brand, any deal is unlikely to save longtime shareholders from enormous losses.
Revenue isn't growing, free cash flow is negative, and the balance sheet is upside down. Peloton's book value (or assets minus liabilities) slumped to negative $590 million at the end of March.
Meanwhile, the company is still valued at nearly $1.5 billion. Even with no premium over the current stock price and aggressive cost-cutting, it's hard to see how the math works for a private equity acquirer.
The value of the brand is also up in the air. There's a lot of competition in the connected-fitness market, and it's not clear that Peloton still holds the mindshare advantage it once did. The brand has helped grow the subscription business, but the subscription base is now stagnating. Paid app subscriptions tumbled 21% year over year in the latest quarter.
Steer clear of Peloton stock
Peloton has no viable turnaround strategy, and a buyout looks unlikely to happen at a meaningful premium to the current stock price. Some sort of buyout or acquisition looks inevitable, as the brand still holds some value, but investors buying the stock today hoping for quick profit shouldn't hold their breath.
Betting on turnarounds can be lucrative, but the odds of a successful outcome for Peloton investors look slim. It's best to steer clear of this once-hot stock.
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Timothy Green has 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.
