Down 80% from record highs, is Peloton stock a buy?

One of the most volatile stocks in recent times, Peloton [PTON], has seen its market cap decline by 80% since January 2021.

After a pandemic fueled run in 2020, the demand for Peloton bikes declined significantly in the last few quarters. Its sales rose from $1.82 billion in fiscal 2020 to $4 billion in fiscal 2021, ending in June. Analysts now expect revenue to fall by 5% to $3.81 billion in fiscal 2022.

Let’s see if the massive pullback in PTON stock makes it a top contrarian buy at current prices.

This article was originally written by MyWallSt. Read more insights from the MyWallSt team here.

The bull case for Peloton

Peloton is currently valued at a market cap of $10.88 billion, and Wall Street expects the company to return to top-line growth after a tepid fiscal 2022. According to estimates, Peloton’s revenue is forecast to rise by 10.4% to $4.21 billion in fiscal 2023, valuing the stock at a reasonable forward price to sales multiple of around 2.5x.

To offset falling sales, Peloton recently initiated a cost reduction program to narrow its losses. The company is focused on optimizing the supply chain and improving manufacturing efficiency, which will lead to $800 million in annual savings by 2024. Peloton also announced the lay off of 2,800 employees or 20% of its workforce and replaced its CEO.

These initiatives will allow Peloton to narrow its losses from $3.46 per share in fiscal 2022 to $0.97 per share in fiscal 2023.

Another key catalyst for Peloton’s stock price will be an acquisition bid. Peloton stock soared by 27% last Monday as buyout rumors broke out. According to analysts, companies including Amazon [AMZN], Nike [NKE], and Apple [AAPL] might eye Peloton as an acquisition target, but a sale is equally unlikely.

The bear case for Peloton

The deceleration in product demand has impacted Peloton’s profit margins drastically. In fiscal Q2 of 2022, its operating expenses stood at $698 million or 61% of sales. So, its operating loss stood at $418 million in Q2, compared to an operating profit of $58 million in the year-ago period.

The company is wrestling with various issues that range from insider selling shares to lawsuits and store closures. Peloton’s products target premium customers, and repeat sales are unlikely. In addition, it will be difficult to expand internationally as the purchasing power is still low in emerging economies, making high up-front costs a major barrier.

So, should I buy Peloton stock?

Investors should expect Peloton to remain volatile in the near term, and it does not make sense to buy PTON shares just on the back of a potential buyout. Instead, investors need to focus on fundamentals and maintain a long-term horizon while buying a stock. Right now, there are far better companies than Peloton trading on the stock market and are available at a discount.

Quickfire round:

Will Peloton stock go down?

Analysts tracking the stock expect Peloton shares to increase by 12% in the next 12-months.

Is Peloton stock overvalued?

Given Peloton’s valuation ratios and consensus price target estimates, PTON is reasonably valued.

Is Peloton profitable?

No, Peloton is still reporting an adjusted loss.

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