Peloton (NASDAQ: PTON) soared during the pandemic, due to the closure of gyms and the need to exercise more at home. Indeed, Peloton stock managed to reach over $160 at its peak, giving the company a valuation of around $50bn. Nonetheless, since the reopening of gyms, and reduced demand for its products, Peloton stock has slipped back to around $24, giving it a market cap of around $8bn. This ‘low’ valuation has led to reported interest from both Nike and Amazon, a factor that’s driving the Peloton share price rto soar over 20% today.
Takeover news
Over the weekend, it was reported that Nike and Amazon were separately evaluating bids for Peloton. Further, there’s also a high possibility of other buyers, including Apple and other large private equity firms. Despite this, it’s all at a preliminary stage and there haven’t been any official talks with Peloton yet. In addition, an Amazon spokesperson declined to comment on “rumours and speculation”.
Any takeover news is a good sign for the company, however for two reasons. Firstly, a takeover will nearly always be at a premium to the current share price, meaning that the shares are likely to soar after any official offer. This is why Peloton stock is up more than 20% today. Secondly, this interest demonstrates that the Peloton share price may be too low. So even if there’s no takeover, this is still a positive sign that the sell-off may have been overdone.
Yet there are some significant hurdles before a deal can be done. For one, the company has a dual-class shareholder structure, which means that co-founder John Foley has majority voting rights on all big decisions, including takeovers. If he doesn’t want a takeover to happen, other shareholders can’t force him.
The future for Peloton stock
After a series of excellent results during the pandemic, revenues have started to decline recently. In fact, in the first quarter of FY22, Peloton tooj in ‘only’ $805m. A slightly more encouraging $1.14bn was reported for the second quarter. Both these results were still far below the $1.26bn reported in Q3 of FY21. Therefore, it’s clear that a lot of the demand was related to the pandemic, and as things continue to return to normality, the situation for Peloton may deteriorate further.
News that the company was considering cutting its workforce and production output due to the reduced demand is also a worry. This is because it lessens the likelihood that the company will ever be able to reach profitability.
Nonetheless, there are still several positives associated with Peloton stock. For one, the monthly churn rate (the number of subscribers leaving each month) was just 0.79% in the second quarter. This demonstrates that there’s still enthusiasm for Peloton’s products.
Overall, I believe that it may be slightly too cheap, and the takeover news is clearly a major positive. But it’s not enough to make me buy. I prefer growth stocks that are actually seeing growth. Peloton has far too many problems, and profitability doesn’t seem close at all. Therefore, I’ll be watching from the sidelines for the time being.