Peloton (NASDAQ: PTON) stock is having a miserable start to 2022. Already, the share price has crashed 24%. It’s not much better over one year either, as it’s down by a huge 83%. I did expect US markets to crash this year. The Nasdaq 100 is down 11.5%, and the S&P 500 is down 8% so far. Does this mean the fall in Peloton stock is just a case of markets being weak? Or is there something up with the company that means I shouldn’t invest? Let’s take a closer look.
Peloton and its IPO
Peloton is a home fitness company selling stationary bikes and treadmills. Its unique offering is its subscription service where members pay a monthly fee for classes and access to a competitive leaderboard. I view this favourably because it brings a higher-margin software element to the business model. If enough customers subscribe to Peloton’s services, it also strengthens its competitive advantage as users will be competing against one another on its unique leaderboard.
The company listed through an initial public offering (IPO) back in September 2019. At the time, the stock was priced at $29 per share. However, after last Friday’s close, the share price is now only a touch over $27. This means I’d have lost money had I bought the stock at the IPO. A 7% loss to be exact, but this doesn’t tell the whole story.
What’s gone wrong?
Peloton’s share price reached a peak of $170 back in January 2021. If I’d bought £1,000 of stock back then, my investment would only be worth £159 today. Ouch.
So, what’s gone wrong? Well, Peloton was a major beneficiary of lockdowns due to Covid. When gyms were shut, consumers were left with little option but to exercise at home. Peloton grew sales by 100% in fiscal 2020 (the 12 months to 30 June 2020), and by a further 120% in fiscal 2021.
This is spectacular growth as the company really capitalised on the increased demand for home workouts. It propelled the stock price from the $29 at IPO, to the January 2021 peak. That was a 486% return. It meany my £1,000 investment at IPO would have been worth a huge £5,862 at the top.
However, revenue growth expectations are much lower now. Indeed, for fiscal 2022, revenue is expected to increase by almost 11%. I still consider this a reasonable growth rate, but it’s far lower than the pandemic-fuelled growth that Peloton achieved in the previous two years.
The valuation of the company has also deflated considerably. Peloton is still loss-making, so I can’t value the company relative to its earnings. Based on a price-to-sales (P/S) ratio, though, the shares are trading on a multiple of 2. However, back when the share price was $170, the stock traded on a P/S of 9. The combination of slowing growth and a declining valuation has led to the share price crash.
Should I buy Peloton stock?
I actually think the valuation is more compelling today, at least compared to this time last year. But is this enough for me to invest?
I don’t think it is. While I see the value in the subscription model, I don’t think it’s a strong enough economic moat to get me interested. I see growth slowing further, so I won’t be adding Peloton stock to my portfolio today.