This post was originally published on this site.
Buying stocks when the price falls sounds like a tantalizing strategy. But it requires more research, particularly during this period when the overall stock market had a strong gain.
Over the last year, through Feb. 3, the S&P 500 index produced a total return of 16.9%. During this period. Peloton Interactive (PTON +5.35%) lost 21.9%. Have investors missed something, and does the stock present a value opportunity in which they’ve discounted Peloton’s long-term prospects?
To make that determination, it’s time to learn more about the company and valuation.
Image source: Getty Images.
What’s happened?
Peloton sells exercise equipment, including stationary bikes, treadmills, and rowing machines. The company also sells subscriptions to fitness classes.
The company’s equipment and subscriptions became popular during the early days of the pandemic when people were stuck at home. You might’ve seen the company’s commercials, which tended to generate a lot of buzz.
Its sales took giant leaps. Peloton’s fiscal 2020 sales, for the period ended on June 30, were $915 million. This figure more than quadrupled in two years, reaching more than $4 billion in 2022.
But the equipment and subscriptions aren’t cheap, and lower-cost competitors have cropped up. And when governments lifted stay-at-home restrictions, people went back to the gym.
As a result, Peloton’s top line has been under pressure. For the recently reported second quarter, paid fitness subscriptions fell 7% year over year to under 2.7 million. Seemingly counterintuitively, management raised prices in the face of faltering subscriptions, although there were some product enhancements.
Still, churn, or the rate at which customers cancelled or paused their subscriptions, increased, albeit at a better rate than management expected. And revenue continued dropping, falling 3% compared to a year ago.
It’s of small consolation that Peloton’s operating loss narrowed from $45.9 million to $14.3 million.
Peloton Interactive
Today’s Change
(5.35%) $0.23
Current Price
$4.63
Key Data Points
Market Cap
$1.9B
Day’s Range
$4.30 – $4.69
52wk Range
$4.09 – $10.25
Volume
32M
Avg Vol
11M
Gross Margin
50.14%
Making the decision
Since Peloton doesn’t report a profit, stock investors can’t use the price-to-earnings (P/E) ratio as a valuation measure. As an alternative, you can look at the stock’s price-to-sales (P/S) ratio.
On that basis, the shares trade at a 0.7 multiple, about half the level from the early part of 2025. Peloton’s current valuation is also a fraction of the S&P 500’s P/S ratio of 3.4.
Nonetheless, given the company’s struggles, I wouldn’t view Peloton’s stock as a bargain. In fact, this has the makings of a value trap.
It’s very difficult for fitness companies to compete long term. After all, while companies may receive high demand for their offerings initially, many people stop using the equipment.
With major challenges already to the company’s top line, I’d stay away from Peloton’s stock.