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.
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