Why Smart Investors Won’t Touch Peloton Stocks With a Ten-Foot Pole in 2023

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Peloton Interactive (Pton -5.86%) Shares ended 2022 down 78% as its downward spiral continued. Since the start of this year, however, the stock is up 40% (as of this writing). Perhaps investor sentiment is finally turning positive in this troubled business?

Not so fast. Even the most astute investors are aware of a big problem with this former Wall Street darling. Here we take a look at what you need to know about Peloton Remaining 2023. This will probably make you hesitate to become a buyer of the stock right now.

Peloton has an inventory problem

Peloton’s sales and customer base have increased as a result of the coronavirus pandemic, when working at home was the real choice for most consumers. But as the impact of the pandemic recedes, the business has reported revenue declines of more than 20% for three quarters a year, the most recent being the first quarter of 2023 (ended September 30).

It will only get worse. The management team, led by CEO Barry McCarthy, expects fiscal second-quarter revenue to decline 37% from the prior-year period, while the connected fitness customer base will grow just 8%.

Predicting pandemic-fueled demand to continue indefinitely was the previous leadership team’s biggest mistake. This has resulted in a hardware inventory glut. As of Sept. 30, Peloton had $993 million in inventory on its balance sheet, its largest asset category. These include clothing, accessories and exercise equipment that are depreciating with each passing day.

In fact, Peloton writes down a portion of its inventory balance each quarter, merchandise it doesn’t think it will be able to sell at a certain price — or ever. In the latest fiscal quarter, inventory reserve balances totaled $280 million. Management broke down this figure in its quarterly filing:

The Company recorded inventory reserves as of September 30, 2022 of $124.9 million primarily related to excess accessories and apparel inventory that the Company does not expect to sell above its current carrying value, $88.3 million primarily related to returned connected fitness products the Company does not expect to sell, and components $41.9 million in reserves for parts that the company estimates will not be used in the future.

High interest rates, high inflation and general macro uncertainty are hurting the peloton severely. people only no Want to fork over four-figure sums for a bike, trade or row in this kind of economic climate? This means that even though management believes there will be an inventory balance

That’s bad, not only because it saves cash, but because it raises the possibility that these products will become obsolete over time as Peloton introduces new versions of its connected fitness lineup. Moving forward, a more cautious approach is needed.

Better to avoid stocks

Until revenue and the connected-fitness customer base begin to grow rapidly again, I see no reason why investors should risk buying this stock. Of course, Peloton shares currently trade at a Price to sale A multiple of just 1.0, well below the historical average of 6.3. But there is too much uncertainty in Peloton’s outlook.

“I was just going to say that we’ve seen some research that indicates the economy is a headwind for us as it is for many other companies,” said CFO Liz Coddington. Fiscal first quarter Earnings call. “And that’s currently impacting demand for near-term connected fitness hardware.”

Because they stopped providing full-year guidance, even the management team clearly admits they don’t have much visibility into the home fitness market this year. If they can’t predict when conditions will improve, how can an individual investor have any idea with much less information?

If at some point in the future, Peloton can right-size its operations by increasing demand and reducing its net losses, it may warrant a closer look. For now, however, it’s best to pass on the stock.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Peloton Interactive. Motley Fool has a revealing policy.


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