The Comeback of PTON Stock Will Be an Uphill Climb

Connected fitness company Peloton (NASDAQ:PTON) went from boom to bust awfully quickly. Prior to the pandemic, the shares of the digital bike and treadmill maker were going for around $30. During the pandemic, PTON stock topped $150 as the lockdowns created record demand for Peloton’s products. But now the surge is over, and Peloton has crashed back to the $30s.

Traders have been buying and selling Peloton, which underwent a big short squeeze on Tuesday, at an especially high rate over the past week. That’s because there has been a nonstop stream of news, including activist presentations and buyout speculation. As a result, there have been all sorts of theories about where Peloton will go next.

Despite the frenzy of rumors, however, traders shouldn’t expect the stock to climb over the long term. PTON stock exploded higher on Tuesday, but its outlook is not as strong as you might expect.

Bad Earnings and No Near-Term Growth

On Tuesday, Peloton announced dreadful earnings. The company reported a GAAP loss of $1.39 per share, which was way below analysts’ average estimate of a loss of 92 cents per share. Its revenues also missed the mean outlook and only grew 6% year-over-year. The company’s customer churn rate was also worrisome, but that might not be too surprising because, as gyms reopen, some people are letting their bike memberships lapse.

But PTON stock didn’t drop on these poor numbers because the company took a variety of other measures that pleased investors. For one, it is slashing 2,800 jobs to reduce its operating losses, and the company’s embattled CEO announced that he was stepping down. Peloton is bringing in a seasoned executive to replace him. Consequently, investors’ sentiment towards the stock improved.

Blackwells Makes an Impassioned Pitch

On Jan. 24, a fund named Blackwells Capital, which owns PTON stock, published a letter to Peloton’s board urging the company to fire its CEO, John Foley. It also suggested that Peloton sell itself.

It appears that the board listened to Blackwells. Indeed, Foley has now stepped down as CEO,  and, according to media reports, a number of companies, including Amazon.com (NASDAQ:AMZN) are reportedly bidding for Peleton.

Blackwells published a lengthy presentation this week highlighting its complaints about Peloton and potential paths for its improvement. The most eye-catching slide is the list of firms that Blackwells considers to be potential suitors for Peloton. It includes some huge companies, like Amazon and Apple (NASDAQ:AAPL).

However, Blackwells also included some more off-the-beaten path ideas in its presentation. It suggested that Spotify (NYSE:SPOT) might want to buy Peloton to cross-sell subscriptions and offer music on the latter company’s devices. According to Blackwells, Lululemon Athletica (NASDAQ:LULU) could sell its apparel in tandem with Peleton’s bikes.

The firm also names Disney (NYSE:DIS) as a potential buyer of Peleton. Blackwells even sees Berkshire Hathaway (NYSE:BRK.B) as a possible suitor, as Warren Buffett has a reputation for turning around companies, and Peloton’s equipment could be offered by Berkshire’s insurance and health care firms.

Peleton Probably Won’t Be Acquired Anytime Soon

The issue for Blackwells and the other owners of PTON stock is that a takeover anytime soon seems to be off the table. Peloton made moves that companies simply don’t undertake if they are planning to sell themselves in the near term. Specifically, Peleton laid off close to 3,000 employees and hired a well-known, highly paid CEO. These are not the sorts of steps a company that’s going to be acquired soon normally takes.

Moreover, Peloton’s new CEO, Barry McCarthy, held key leadership roles at Netflix (NASDAQ:NFLX) and Spotify, which are two of the greatest digital subscription companies of our era. Peleton’s decision to recruit him suggests that it believes that its issues are a temporary bump in the road for the beleaguered company.

The Bottom Line on PTON Stock

Peloton’s strategy seems perfectly reasonable from a long-term point of view. Foley, its departing CEO,  had to go, given his missteps over the past few quarters. And his replacement appears to be a great match for the company as it tries to resume growing.

However, I suspect that a lot of investors will be disappointed in PTON stock. The company’s new CEO has a huge task ahead of him that will take several quarters, if not years, to implement. And it seems highly likely that Peloton is not really close  to being acquired.

Long story short, Peloton’s  stock price has certainly come down a lot. If PTON stock is in the $20s once traders no longer price in the takeover chatter, maybe it’s worth a nibble. Don’t, however, count on any huge, short-term bounce by the shares. Peloton is a turnaround story, and it won’t play out for awhile.

On the date of publication, Ian Bezek held a long position in BRK.B and SPOT stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.

 

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