Cabot Small-Cap Confidential Issue: November 7, 2024

The Big Idea

Peloton (PTON) was a massive stock during the pandemic, when everybody was stuck at home and exercise equipment and access to social networks beyond the walls of home base was hugely important.

The stock began trading at 29 on August 27, 2019. It hit an all-time high of 167 on January 13, 2021. At that share price, Peloton carried a market cap north of $47 billion!

Those were the good old days.

Peloton’s average annual revenue growth from 2018 through 2022 was over 100% and was never below 99%. Sales topped out at just over $4 billion in 2021.

But the good times wouldn’t last.

As the pandemic faded, people got back to outdoor activities and normal socializing. Inflation raged, and Peloton’s growth trajectory shattered.

Revenue has been shrinking over the last three fiscal years (which end in June), first by -11% (2022), then -22% (2023) then by -3.6% (2024), when revenue was only $2.59 billion. That’s a far cry from the $4 billion-plus of 2021.

Earnings have been a disaster as well. Peloton lost $3.36 per share in 2023, and $1.40 in 2024.

But, if everything went swimmingly for Peloton we wouldn’t be discussing it today, would we?

While there are numerous challenges facing Peloton, it is a compelling turnaround story.

The company has great brand awareness, great products, a loyal following, bad-to-better fundamentals and an incoming CEO with extensive experience in the space.

Lastly, PTON has a market cap of only $3 billion and a price tag under 8.

The Company

Peloton (PTON) operates the world’s largest immersive and interactive fitness platform, connecting a community of 3.7 million subscribers with instructors from a wide variety of disciplines.

The company makes fitness approachable, entertaining, convenient and social, selling equipment and services throughout the U.S., Canada, Germany and the U.K.

Peloton sells a Bike, Tread and Rower, each of which includes a touchscreen and speaker system that streams the user’s workout of choice, either live or on-demand.

Activities range from indoor cycling, running, walking, hiking, rowing and yoga to bootcamp, stretching, strength, meditation and more.

People often gravitate toward a selection of instructors that they grow to like, and there are groups of subscribers they can join as well. While most of the classes are led by instructors, some are gamified.

Whether you love or hate Peloton and its equipment, it’s hard to argue that it hasn’t been a pioneer in the connected fitness space. It competes across the board, as this image from the company’s investor presentation shows.

That said, Peloton’s subscriber growth has stalled. As the turnaround story unfolds, we’ll be looking for two things on this front: (1) can the company get subscriber growth going again, and/or (2) can they monetize the existing sub base better?

Products & Services

Peloton combines high-end, attractive hardware with engaging software that marries exercise equipment with on-demand content that subscribers can access again and again.

The company sees its platform as having five main components: content and music, world-class instructors, community of subs, hardware/software/user experience and a strong brand.

Here are pictures of the company’s current product lineup and pricing.

The main difference between the Bike and Bike+ is a bigger screen that rotates, better speakers and an auto-resistance knob. All that for “just” $1,000 more.

The main difference between the Tread and Tread+ is a larger, softer belt, much larger screen with soundbar, free mode (your feet move the belt, not the motor) and a higher grade of incline (15% vs. 12.5% on the Tread). The extra $3,000 for those features seems like a lot, but I’ve never used the Tread or Tread+.

I wasn’t even aware of the Guide before writing this report. It’ll be interesting to see if management puts more effort into growing/marketing this device.

Growth Initiatives

New CEO: Peter Stern, the new CEO, starts on January 1, 2025. He has extensive experience in the health and wellness space (co-founded Apple Fitness Plus), with consumer hardware, software and subscriptions services, and is a big fan and user of Peloton’s products. Mr. Stern’s compensation is aligned with PTON’s growth, tilted more toward performance instead of stock-based compensation.

Focus on Tread Market: Management believes the Tread market is twice the size of the Bike market. PTON has not gone after this market in a big way yet but will be going after it aggressively now.

Personalized Offers, Retail Distribution, International Expansion, New Strength+ App: The company has a grab bag of misc. growth initiatives that could, collectively, move the needle.

Focus on Men: Two-thirds of Peloton’s users are women, implying a big growth opportunity with men.

Less Discounting, More Price Increases: Pros and cons here, but big picture, PTON is more than likely to bump prices up. The last price hike was in April 2022 (from $39 to $44/month for subscription). A $50/month subscription price seems likely.

OPEX Cuts and Price Increases Drive Margin Expansion: PTON is finally on the path to EBITDA profitability, for the first time ever. The company has cut $1 billion in costs over the last two years, including $200 million in cuts in 2024. There is room for another $100 million in cuts, the net result of which should push EBITDA margins considerably higher and drive EBITDA profit north of $300 million in 2025 and $400+ million in 2026.

Debt Reduction: PTON just increased fiscal 2025 free cash flow (FCF) guidance from $75 million to $125 million, a big improvement from -$86 million in fiscal 2024. With current cash of $722 million and debt of $1.49 million, there is potential for the company to pay down debt, thereby reducing interest expense and boosting EPS. The market would likely welcome this.

Business Model

Peloton sells both connected fitness products (Bikes, Treads, etc.) and software under a subscription model. In fiscal 2024 (ended in June) connected fitness products generated 37% of revenue while subscriptions generated the remaining 63%. The company outsources manufacturing.

The Bottom Line

Peloton’s revenue shrank by 22% in fiscal 2023 and by 3.6% in fiscal 2024, to $2.7 billion. In 2023 EPS was -$2.37 and in 2024 EPS was -$1.40.

In the most recent quarter (Q1 fiscal 2025, ended in September), revenue shrank by 1.6% to $586 million and EPS was $0.10. Those results were better than expected, with revenue beating by $13 million (2.3%) and EPS beating by $0.10. EBITDA of $116 million destroyed Street expectations of $56 million.

Now, Peloton is on a path to sustained EBITDA profitability, which is a major shift from the losses in recent years.

Current consensus estimates, which are likely conservative since there aren’t a ton of bulls, suggest a fiscal 2025 revenue decline of -8.5% to $2.48 billion and adjusted EPS of $0.41. That EPS figure is a wonky number that I’ll keep an eye on as it doesn’t align with quarterly consensus estimates, probably because new estimates are currently feeding into my data platform.

Adjusted EBITDA this year could be around $300 million.

Risks

• Subscriber numbers are declining slightly faster than new subscriber growth. That said, this is happening at a slower rate than in previous quarters (monthly churn just 1.6%).
• New CEO will take time to get up to speed, suggesting updated growth strategy and implementation timing likely in mid-2025, which could feel like a way off to some investors.
• Operations expense (OPEX) cuts may not materialize as expected.
• High-cost “luxury” exercise equipment, a highly discretionary spending category.

Competition

In the connected fitness market, Peloton’s main competitors are iFit, Bowflex, Echelon, Tempo, Hydrow, Tonal and Concept2. In the fitness app market, it competes with many of the same players, as well as JustFit, MindBody, Sweat, Body, Apple Fitness+ and Bend.

The Stock

Trading Volume: PTON trades an average of 19.5 million shares daily. We are not likely to move this stock.

Historical Price: PTON came public at 29 on August 27, 2019. It hit an all-time high of 167 on January 13, 2021. With the exception of a three-to-four-month “recovery” in late 2023, it’s been mostly downhill since then. PTON appears to have bottomed in the high 2s this past summer. The stock surged back to life after Q4 fiscal 2024 earnings in late August (+35% on the day), then PTON hung out in the 4.2 to 5.2 range through mid-October. Shares climbed into the high 6s prior to the October 31 Q1 fiscal 2025 report, after which PTON rallied 28% to close at 8.5. Shares have pulled back a little to trade just under 8 since.

Valuation: PTON trades with an undemanding EV/2025 Sales multiple of 1.7.

Short-Term Buy Range: Expect to buy in the 7.25 to 9.0 range. In the short term, because of the crazy week with the election and FOMC meeting, we will start with a half-sized position. BUY HALF

The Next Event: Nothing on the immediate horizon.

Current Recommendations

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

Glossary

Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.

The next Cabot Small-Cap Confidential issue is scheduled for

December 5, 2024.

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