Peloton stock backpedals to a new low as shorts win

Key Points

• Last week, Peloton shares fell to an all-time low of $4.10 following a fiscal 2024 second quarter earnings report that the market found far from exhilarating.
• A pressing need to spend on new product development and marketing will make spinning a profit difficult for Peloton in the years ahead.
• Despite the troubles, takeover speculation and technical oversold conditions may be two big reasons to take a chance on PTON shares. 

A month ago, Peloton Interactive, Inc. NASDAQ: PTON rode news of a Tik Tok deal to a four-month high of $7.42. We wondered if the former pandemic high flier turned meme stock could keep up the pace.

That answer appears to be a resounding no.

On Friday, shares of the techy fitness company fell to an all-time low of $4.10, erasing its recent gains and leaving investors wondering what’s next. The downturn stemmed from a fiscal 2024 second quarter earnings report that the market found far from exhilarating.

Revenue declined 6% year-over-year to $744 million led by a 16% drop in connected fitness sales. An area of strength, however, was the subscription business, which grew sales 3% and accounted for 58% of total revenue. This was a reflection of Peloton’s partnerships with third-party retailers such as Dick’s Sporting Goods and Amazon.com. Another bright spot, thanks to a significant dip in operating expenses, was that the gross margin expanded to 40.3%.

In the end though, it was not enough to prevent the company from posting yet another quarter of steep losses. A net loss of $0.54 per share was in-line with consensus but brought Peloton’s accumulated deficit to nearly $5.3 billion. Based on management’s lowered fiscal 2024 outlook, Peloton won’t be digging itself out of this hole anytime soon.

Full-year revenue is now forecast to be approximately $2.7 billion which would be a step back from the $2.8 billion generated in fiscal 2023. The projection suggests that Peloton's turnaround strategy is struggling to gain traction two and a half years removed from its damaging Tread+ treadmill recall. 

Its shortcomings are particularly disappointing, considering the $90 billion global fitness subscription market is ripe for technological disruption. Although Peloton’s subscription business is improving, a pressing need to spend on new product development and marketing will make spinning a profit difficult in the years ahead.

What is the short interest on PTON?

As the losses continue to mount for Peloton, PTON short sellers are racking up gains. Incredibly, the stock is down 97.5% from its January 2021 peak. Bears that pounced on the January 2024 TikTok surge as a short opportunity could be up more than 40%.

Peloton’s financial struggles and inability to sustain a stock rally have made it a popular short selling target over the last few years. PTON has failed to string together more than two straight months since its stunning nine-month win streak of 2020.

A short sale involves borrowing equity shares and selling them in the open market in hopes of buying them back at a cheaper price. When the shares are returned to a broker, the price differential (less any lending interest) is the short seller's profit.

In spite of PTON’s dismal performance and penny stock price, short sellers continue to bet against it. Approximately 18% of Peloton’s 313 million share float is held short. While bullish traders keep up the faith for a short squeeze rally, bearish sellers keep laughing all the way to the bank. Will this pattern continue?

What is Wall Street’s updated take on Peloton?

Wall Street’s reaction to Peloton’s latest bombshell has been mixed. Most analysts have taken a neutral stance on the depressed stock since the quarterly update. Five have called it a buy, and two think it's still a sell. 

As usual, sell-side price targets on PTON are all over the place. Oppenheimer thinks it can get to $20.00 over the next 12 months. Morgan Stanley sees the stock slipping to $3.00. The average analyst price target since the fiscal Q2 report is $7.34, which implies about $3.00 upside from Friday’s close. 

One reason — and perhaps the best reason — to take a bullish position on PTON here is to speculate on a takeover. The company’s 6.7 million member base of fitness enthusiasts is growing. It could represent an attractive asset to an apparel company like Nike or Lululemon or a consumer tech company like Apple — especially with a market cap of only $1.5 billion.

Another reason to take a shot on PTON here is its chart. Technical oversold conditions have set in as a result of last week's selloff. On the daily chart, a 24 relative strength indicator (RSI) reading is among the lowest in the Nasdaq. At the very least, there could be a near-term ‘dead cat’ bounce.