Peloton Earnings: I Was So Wrong, Buy (Rating Upgrade) (NASDAQ:PTON)

Investment Thesis

Peloton Interactive, Inc. (NASDAQ:PTON) just came out with fiscal Q4 2024 earnings that showed all the bears just how wrong they were. And I want to include myself in that lineup as one of the most outspoken SA bears on PTON.

The business is shrinking, and of that, there’s no doubt. But the fact of the matter is that Peloton is likely going to survive!

I love investing because it’s the best reminder (outside of marriage life) of what a complete idiot you can be and how much you must be humbled in life.

Now, before we go too far ahead of ourselves, I want to be clear; the obvious matter is that Peloton’s debt remains an issue. The business is still operating in a highly competitive and price-sensitive industry. There are many alternative fitness options. And so, there are still plenty of reasons to hate this stock.

And yet, this updated guidance puts all those reasons into the rearview mirror. Here’s why I’ve now upgraded this stock to a buy.

Rapid Recap

To outperform, you have to be willing to change your mind when the facts change. The only reason why outperform, is that I’m able to embrace new facts that are different from a dated narrative. Case in point, I successfully called PTON a sell in the past year:

The stock has massively underperformed the S&P500. But now, I’ve turned around calling my narrative outdated when I previously said:

I estimate that Peloton is priced at approximately 28x next year’s free cash flow. A figure that is too high for a business that is barely delivering any topline growth. And on top of that, Peloton carries more than $650 million of net debt.

Investors would do well to avoid this stock.

We have a lot to go through, so let’s get to it.

Why Peloton? Why Now?

Peloton is a leader in the fitness industry, offering an experience that combines hardware like premium stationary bikes and treadmills with a subscription-based platform providing access to a vast library of instructor-led workout classes.

Members can engage in various fitness activities, including cycling, running, and strength training, all while being part of a supportive online community. The idea here is that Peloton enhances the member experience with personalized workout programs and community-building functionalities. In my experience, I’ve found their programs a complete waste of time, but this isn’t about me.

Next, Peloton faces challenges in achieving significant revenue growth in the near term. The company reported fiscal Q4 2024 results with total revenue flat y/y. This slow growth, following a period of multiple quarters of negative growth since Q2 FY22, reflects ongoing difficulties in expanding its connected fitness hardware sales.

And yet, my investment is about the thesis of Peloton’s strategy to zero in and focus on cost management and enhance its profitability.

Peloton’s Revenue Growth Rates Are Still Negative

Peloton’s guidance for fiscal 2025 points towards a negative 9% at the midpoint. And yet, realistically, it’s possible that when fiscal 2025 is ultimately fully reported its revenues will only be down 5% y/y or thereabouts.

This is slightly worse than what analysts were expecting. Analysts were expecting approximately flat y/y revenue growth rates. However, since investors have long ago given up on Peloton and viewed it as a dead company walking, particularly in light of its overleveraged balance sheet and poor economic profile, I believe investors will give this a pass. Because Peloton’s guidance took investors by surprise.

PTON Stock Valuation – 6x This Year’s Free Cash Flow

Let’s recap what I previously said about Peloton:

For now, I continue to believe that in fiscal 2025, Peloton’s free cash flow will hover around $50 million. This figure assumes that much of the payroll and R&D restructuring has already taken hold. As a reference point, Peloton’s free cash flow for the fiscal year 2024 that is about to end is aiming for about a negative $60 million. Consequently, if the next fiscal year delivers around $50 million of free cash flow, that is slightly more than $100 million y/y improvement. In the best-case scenario, I trust you’ll agree. (emphasis added).

In hindsight, while I was in the generally correct ballpark of my free cash flow assumption for fiscal 2024 as Peloton’s fiscal 2024 free cash flow figure came in at negative $85 million, significantly below my estimate of negative $60 million.

However, my assumptions about 2025 were wrong! I was expecting to see around $50 million of free cash flow for fiscal 2025. And now see below what Peloton is guiding for in the year ahead.

Even if we earmark about $40 million of maintenance capex, Peloton is capable of delivering about $210 million of free cash flow. That puts the stock priced at roughly 6x this year’s free cash flow. That’s a whopping investment, right? Well, yes and no.

The issue here is that Peloton still carries about $800 million of net debt. Clearly, for a business with a market cap of $1.2 billion, having to tackle $800 million of net debt is a massive figure. And there’s no doubt that investor confidence in Peloton is very low right now.

As illustrated by the graphic above, investor expectations are rock-bottom, and many investors believe that Peloton is uninvestable.

Risks to My Investment Thesis

Here are some of the risks bulls have to consider.

Peloton operates in a highly competitive fitness industry, where it faces intense competition from other connected fitness brands, traditional gym equipment manufacturers, gyms, even arguably even YouTube.

Moreover, competitors offer similar products, usually at lower prices, which pressures Peloton to differentiate itself through content and community. How successful has this been? Well, you know, as well as I do, not very successful post-pandemic.

Additionally, as more and more households return to the office, shelling out for stay-at-home fitness solutions has questionable appeal.

The Bottom Line

While there are certainly plenty of hairs on Peloton’s investment thesis, I believe that the current valuation at approximately 6x forward free cash flow compensates for many of the inherent risks.

Peloton is still navigating a highly competitive market with a challenging financial landscape, but the substantial improvement in free cash flow cannot be ignored.

It’s clear that the market has low expectations, which may present an opportunity for those willing to take a contrarian stance.

We all make mistakes, but with Peloton, it seems at least I’m peddling back on the right track.