During the trading day on January 20, 2022, CNBC reported that, based on a review of “internal documents,” Peloton Interactive, Inc. (NASDAQ: PTON) is temporarily halting production of its connected fitness products, such as stationary bicycles and treadmills, due to a significant slowing of demand. The stock plummeted 24% on that news, closing at US$24.22.
The soap opera continued after the close on January 20 when the company reported partial preliminary results for the quarter ended December 31, 2021 (2Q FY22). The reports were generally constructive, particularly factoring in the stock’s precipitous fall both on January 20 and over the last 2 ½ months, and did not suggest a steep drop in demand. (The stock closed at US$86.06 on November 4, 2021.) Even more surprising, Peloton made no mention of any internal halt to production in its January 20 release.
In more detail, Peloton’s 2Q FY22 revenue and adjusted EBITDA were US$1.138 billion and a loss of US$260 million to US$270 million, respectively. On November 4, 2021, the company issued 2Q FY22 sales and adjusted EBITDA guidance of US$1.1 billion to US$1.2 billion and (US$325) million to (US$350) million, respectively.
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In addition, the company disclosed that its Connected Fitness Subscriptions totaled 2.77 million on December 31, 2021, lower than management’s November 4, 2021 guidance of 2.8 million – 2.85 million, but still noticeably up from 2.492 million on September 30, 2021.
| (in millions of US $, except for shares outstanding) | FY22 Guidance | 2Q FY22 Prelim. Results | 2Q FY22 Guidance | 12 Months Ended | 1Q FY22 |
| Revenue | $4,600 | $1,138 | $1,150 | $4,069.2 | $805.2 |
| Adjusted EBITDA | ($450) | ($265) | ($338) | ($98.7) | ($233.7) |
| Connected Fitness Subscriptions | 3,400,000 | 2,770,000 | 2,825,000 | 2,492,000 | |
| Connected Fitness Quarterly Workouts | 120,515 |
Based on its January 20, 2022 close, Peloton’s enterprise value (EV) has been cut to about US$8 billion. Clearly, the stock is difficult to value based on its cash flow, or EBITDA, as its EBITDA for calendar 2021 is in the vicinity of a loss of US$480 million. However, most analysts agree there is scope for a significant cut in the company’s cost structure. To that end, Peloton has apparently already hired the well-known management consulting firm McKinsey & Company to address this issue.
Perhaps more interesting from a valuation perspective, Peloton’s high-margin (~65% gross margin) subscription revenue totals about US$1.02 billion for the twelve months ended September 30, 2021. The ratio of the company’s EV to its subscription revenue only is then just 7.8x. This relatively low valuation could potentially seem quite attractive to an acquirer.
Given the better-than-expected December 2021 quarterly results, a high level of short interest (10.6% of the float was shorted as of year-end 2021), and its fairly reasonable ratio of EV to subscription revenue, Peloton shares may be due for a bounce. At the very least, shorts should seriously consider covering.
Information for this briefing was found via Edgar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
