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Peloton stock is up 98% in 2023 taking the market cap of the company to 5.5 billion dollars. With 871 million of cash and 1.7 billion in debt, the enterprise value is roughly 6.3 billion.
Peloton’s recent earnings report revealed the company made 3 billion in revenue last year. However, the company is still not profitable, posting negative net income as well as negative adjusted ebitda and free cash flow. So the company is unprofitable and valued at two times revenue.
One reason the stock has rallied is that the company has made steps to cut costs, manage debt and move the company towards profitability.
New CEO Barry McCarthy has outsourced the manufacturing of Peloton products, cut headcount by over 50% and is positioning the company towards higher margin subscriptions.
Peloton units like bikes are loss leaders and as you can see, Peloton subscriptions now drive more revenue than Peloton hardware products.
Importantly, in the most recent quarter, Peloton reported minus 94 million in free cash flow which is a huge improvement from the previous year’s minus 747 million. In fact, if you strip out one time costs, free cash flow for the quarter would have been just about positive.
The focus on costs and the raising of new debt means the company should avoid bankruptcy. But despite these improvements, an investment in Peloton still has risks.
Notably, membership growth is flat over a quarterly and yearly basis. And subscription revenues didn’t increase in the recent quarter. Furthermore, management expects only a 2% increase in subscriptions for next quarter. So we’re not seeing an awful lot of growth.
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Peloton stock is up 98% in 2023 taking the market cap of the company to 5.5 billion dollars. With 871 million of cash and 1.7 billion in debt, the enterprise value is roughly 6.3 billion.
Peloton’s recent earnings report revealed the company made 3 billion in revenue last year. However, the company is still not profitable, posting negative net income as well as negative adjusted ebitda and free cash flow. So the company is unprofitable and valued at two times revenue.
One reason the stock has rallied is that the company has made steps to cut costs, manage debt and move the company towards profitability.
New CEO Barry McCarthy has outsourced the manufacturing of Peloton products, cut headcount by over 50% and is positioning the company towards higher margin subscriptions.
Peloton units like bikes are loss leaders and as you can see, Peloton subscriptions now drive more revenue than Peloton hardware products.
Importantly, in the most recent quarter, Peloton reported minus 94 million in free cash flow which is a huge improvement from the previous year’s minus 747 million. In fact, if you strip out one time costs, free cash flow for the quarter would have been just about positive.
The focus on costs and the raising of new debt means the company should avoid bankruptcy. But despite these improvements, an investment in Peloton still has risks.
Notably, membership growth is flat over a quarterly and yearly basis. And subscription revenues didn’t increase in the recent quarter. Furthermore, management expects only a 2% increase in subscriptions for next quarter. So we’re not seeing an awful lot of growth.
#stocks #investing #stockstowatch #overlookedalpha
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NewsTranscript
00:00 Should you buy Peloton stock?
00:02 Peloton stock is up 98% in 2023 taking the market cap of the company to $5.5 billion.
00:10 With $871 million of cash and $1.7 billion in debt, the enterprise value is roughly $6.3
00:17 billion.
00:18 Peloton's recent earnings report revealed the company made $3 billion in revenue last
00:22 year.
00:23 However, the company is still not profitable, posting negative net income as well as negative
00:27 adjusted EBITDA and free cash flow.
00:30 So the company is unprofitable and valued at 2 times revenue.
00:34 One reason the stock has rallied is that the company has made steps to cut costs, manage
00:38 debt and move the company towards profitability.
00:41 New CEO Barry McCarthy has outsourced the manufacturing of Peloton products, cut headcount
00:47 by over 50% and is positioning the company towards higher margin subscriptions.
00:52 Peloton units like bikes are loss leaders and as you can see Peloton subscriptions now
00:57 drive more revenue than Peloton hardware products like bikes.
01:01 Importantly, in the most recent quarter, Peloton reported -$94 million in free cash flow, which
01:07 is a huge improvement from the previous years -$747 million.
01:12 In fact, if you strip out one-time costs, free cash flow for the quarter would have
01:17 been just about positive.
01:19 The focus on costs and the raising of new debt means the company should avoid bankruptcy,
01:24 but despite these improvements, an investment in Peloton still has risks.
01:28 Notably, membership growth is flat over a quarterly and yearly basis and subscription
01:33 revenues didn't increase in the recent quarter either.
01:36 As well, management expects only a 2% increase in subscriptions for next quarter, so we're
01:41 not seeing an awful lot of growth.
01:43 Let's consider a scenario where Peloton hardware products are able to break even next
01:48 year and subscriptions manage to generate $200 million in annual EBITDA.
01:53 Assume those earnings grow 20% per year for 10 years and then the company trades at 25
01:58 times those earnings.
01:59 In that scenario, Peloton would be worth around $26 billion in 10 years time for an investment
02:05 return of just over 15% per annum.
02:08 But that scenario is highly optimistic for a number of reasons.
02:11 First, the company is nowhere close to making $200 million in EBITDA.
02:16 Second, 20% growth seems highly unlikely based on current trends.
02:21 And third, Peloton has almost $2 billion in debt that's going to need to be serviced
02:25 and paid back which will continue to hurt earnings.
02:28 So Peloton needs to do a lot more than this to justify a $6 billion valuation, which is
02:33 why I give the stock a bearish rating.
02:35 But these are my personal opinions, not financial advice and I've got no position in Peloton's
02:40 stock.
02:41 For more detailed investing ideas, visit our website overlookedalpha.com.