Has Peloton’s stock bottomed out?

After Interactive Platoonit is (NASDAQ: PTON) the stock price recently fell to a low of $22.81, the stock rebounded strongly to hit the 30 highs. Although there have been reports that Amazon and Nike could explore an acquisition offer for the company, investors seem to have great confidence in management’s new plan to put Peloton on a stronger financial footing in terms of profitability.

These are good signs that the stock has bottomed out. Still, investors shouldn’t get too excited just yet. Here’s what to expect from the cost-cutting plan and why the stock’s rise from these levels may be limited in the near term.

Image source: Peloton Interactive.

Master the costs

Revenue was up just 6% year over year in the last quarter, an annualized rate of 56% from the same quarter two years ago. On a two-year compound basis, this may sound great, but management cited weaker-than-expected demand and reduced traffic, which gives a negative outlook for Peloton’s near-term revenue direction.

Slowing demand trends have been a disaster for Peloton’s results. The company continued to spend almost a third of its revenue on marketing to win new customers, which contributed to an operating loss of $425 million in the quarter, compared to a profit of $58 million. in the same quarter last year.

With bike and treadmill sales not high enough to cover customer acquisition costs, Peloton unveiled a comprehensive cost-cutting plan to firm up profit margins. Peloton is reversing its manufacturing expansion plan that it pursued a year ago with the acquisition of Precor.

By optimizing logistics and delivery costs, reducing warehouses and improving the efficiency of its manufacturing, management is targeting $800 million in annual savings by fiscal year 2024. Unfortunately, this includes a reduction in Platoon staff. On the other hand, management plans to continue investing to support its roster of studio content and instructors.

It will take time to establish meaningful profitability

While $800 million in cost savings sounds like a lot, it might not significantly boost Peloton’s profitability, at least not anytime soon. In the first six months of fiscal 2022, Peloton has already posted an operating loss of $785 million. Management said the adjusted EBITDA (earnings before interest, tax, depreciation and amortization) loss for the full year would be between $675 million and $625 million.

When asked on the earnings call if he could provide a long-term operating margin target for connected fitness products, management wouldn’t go there, but pointed out that the target for now was to bring net customer acquisition costs down to neutral.

However, the cost savings over the next few years are designed to position Peloton for long-term sustainable growth, both in terms of revenue and profit, which is good news for investors. . The plan should guide Peloton towards a constant free cash flow to self-finance the company without any help from external financing, such as issuing debt or new shares.

Keep expectations under control

The most important question right now is what is the value of Peloton’s business? Since management does not provide long-term margin guidance, it is difficult to assess an unprofitable business. But Peloton remains a strong brand and has the advantage of generating around a third of its revenue from high-margin subscriptions.

The average profit margin of companies in the S&P500 The index has hovered around 10% over the past five years. If Peloton’s long-term margin can average at this level, its normalized profit would translate to $370 million based on management’s forecast for annual revenue of 3.7 to 3.8 billions of dollars. With a current market cap of $12.4 billion, that would put Peloton’s price-to-earnings ratio at 33.

That would be a fair assessment for a leading brand operating in a growing market. The virtual fitness market is expected to grow 33% per year through 2027, according to Allied Market Research. Peloton continues to attract more fitness-connected subscribers, up 66% year-over-year to 2.77 million last quarter.

Still, management doesn’t expect the cost-cutting plan to be completed until at least fiscal 2024, so reaching a meaningful margin level will take time. For this reason, investors should keep their expectations in check and not expect the stock to rise much more in the near term.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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