Is Peloton Stock a Buy After a Recent Downgrade?

Key Points

• Peloton stock has dropped over 13.5% since receiving a downgrade by Wolfe Research.  
• The company known for its signature exercise bikes and treadmills is attempting to pivot to become a connected fitness company.  
• This could be a profitable path for the company, but for now analysts aren’t so sure.  
• Short-term investors will be able to find better options in this sideways market. 

Remember when the biggest controversy facing Peloton Interactive Inc. NASDAQ: PTON was a holiday commercial? Those were good times for the company. As fate would have it, people asked for Peloton workout equipment in their homes a few months removed from that commercial's debut. 

PTON stock sloughed off the controversy and charged over $162 a share at the end of December 2022. However, it has been a different story for the company and its stock since then. As of the market's close on June 26, Peloton was changing hands at $7.24. For those scoring at home, that's a 95% drop in the stock price. 

But just as investors were concerned that PTON stock would have a shelf life as some of its iconic products, the company announced a change in strategy. It could work, but analysts aren't so sure. A recent downgrade has been the latest blow to the stock price. So let's take a look at the turnaround story for Peloton. 

Can Peloton Become the Netflix of Fitness? 

In 2022, Peloton hired former Netflix NASDAQ: NFLX chief financial officer (CFO) Barry McCarthy to be its chief executive officer (CEO). In 2023, the company hired two executives to positions they left at Twitter. Leslie Berland is the new chief marketing officer. In March, Delana Brand joined the company as chief people officer. Brand was also most recently at Twitter. 

Not surprisingly, the company is pivoting to participate in internet economics to reposition itself as a connected fitness company. 

Netflix has always had a subscription element to its business model. However, the company is now leading with its subscription service. In May, the company announced its tiered app service that provides the Peloton experience "for anyone, anywhere." 

The idea behind this strategic pivot is that Peloton can now bring customers into the Peloton "family" that don't necessarily own a Peloton product today. This increases the company's addressable market and creates a high-margin business. While it's true the company will have to keep delivering fresh content (sound familiar to Netflix?), it's a strategy that makes sense. 

Analysts Lukewarm for Now 

Peloton delivered its third-quarter 2023 earnings report in May. Since then, analyst sentiment has been chiefly bearish. The Peloton analyst ratings from MarketBeat show Barclay's as the only analyst firm upgrading the stock. And in doing so, it lowered its price target. 

But the Wolfe Research downgrade did the real damage. At the core of Wolfe's argument is concern over the company's long-term ability to sustain profitability. Peloton did itself no favors with revenue guidance for the coming quarter of $630 to $650 million. Even at the top end, the company would be well below the $678.7 million recorded in the same quarter in 2022. 

Analyst sentiment can change. Transitions like the one Peloton is trying to pull off will take time. But if Wolfe is right, PTON stock could still have another 20% to drop. That's a lot to ask from Peloton shareholders who have already endured a significant loss. 

If You Like the Company, Consider Waiting on the Stock 

By now, many individuals who bought a Peloton bike or treadmill during the pandemic may use it less than before. Fitness, like investing, requires discipline. 

It will take discipline to invest in PTON stock right now. As a long-term investment, there may be some value here. But in the current market that favors nimble traders, PTON stock looks like one to avoid. 

That said, the stock is holding above a key level of support. In prior challenges of that support level, buyers swooped in. That has yet to happen. 

If that sounds wishy-washy, it's because there are a range of not only believable outcomes for Peloton. At least one or more quarters will be necessary before investors can see a trend. In the meantime, you can find better value. But PTON stock may be one to include on your speculative watchlist.