Over the past six months, Peloton’s stock price fell to $6.30. Shareholders have lost 5.6% of their capital, which is disappointing considering the S&P 500 has climbed by 10.9%. This might have investors contemplating their next move.
Is now the time to buy Peloton, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Peloton Will Underperform?
Despite the more favorable entry price, we don’t have much confidence in Peloton. Here are three reasons why PTON doesn’t excite us, plus one stock we’d rather own.
1. Decline in Connected Fitness Subscribers Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like Peloton, our preferred volume metric is connected fitness subscribers). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Peloton’s connected fitness subscribers came in at 2.66 million in the latest quarter, and over the last two years, averaged 4.5% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Peloton might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Peloton, its EPS declined by 22.3% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. Cash Flow Margin Set to Decline
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict Peloton’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 16.4% for the last 12 months will decrease to 12.5%.
Final Judgment
Peloton doesn’t pass our quality test. After the recent drawdown, the stock trades at 24.3× forward P/E (or $6.30 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now. We’d suggest looking at the most dominant software business in the world.
Stocks We Would Buy Instead of Peloton
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