Fitness stock Peloton Interactive, Inc. (PTON) has been gaining momentum lately. The stock has gained 31.2% over the past month. However, it has declined 64.9% year-to-date and 72.6% over the past year, closing the last trading session at $12.57.

PTON posted a wider-than-expected loss for its fiscal first quarter, as a steep decline in connected fitness products revenue outweighed an increase in subscription revenue. Its revenue outlook for the fourth quarter is between $700 million and $725 million, which is well below analysts’ estimates of $874 million.

After the massive demand wave for its home exercise equipment and subscription-based fitness classes during the pandemic, the company has been hit hard by diminishing consumer demand.

Moreover, its turnaround remains a work in progress. In order to cut its expenses, the company declared rounds of layoffs this year. More recently, the company extended its refund period for its recalled Tread+ treadmill, which was recalled over multiple user injuries and death.

Here is what could influence PTON’s performance in the upcoming months:

Deteriorating Financials

PTON’s revenue declined 23.4% year-over-year to $616.5 million for the fiscal 2023 first quarter ended September 30, 2022. Its gross profit decreased 17.4% from the year-ago value to $217.2 million. Its loss from operations rose 4% from its prior-year quarter. Its net income came in at a negative $408.5 million, worsening 8.6% year-over-year.

Bleak Growth Prospects

Street expects PTON’s revenues to decline 37% year-over-year to $714.60 million in the fiscal 2023 second quarter (ending December 2022). The loss per share for the ongoing quarter is expected to come in at $0.65. Also, the company missed the consensus revenue estimates in each of the trailing four quarters.

Furthermore, analysts expect the company’s loss per share to come at $2.36 for the current year ending December 2022. Its revenue is likely to decrease 25.3% year-over-year to 2.68 billion in the current year.

Frothy Valuation

In terms of forward EV/Sales, PTON’s 2.17x is 94.6% higher than the 1.11x industry average. Its forward Price/Sales of 1.60x is 87.2% higher than the 0.85x industry average. And the stock’s 129.04x forward Price/Book is significantly higher than the 2.66x industry average.

Low Profitability

PTON’s trailing-12-month gross profit margin of 19.23% is 45.76% lower than the 35.45% industry average. Its trailing-12-month asset turnover ratio of negative 0.85% is 16.29% lower than the 1.01% industry average. And the stock’s trailing-12-month negative 20.67% levered FCF margin compares to the 1.26% industry average.

In addition, the stock’s ROCE, ROTC, and ROTA of negative 324.03%, 29.51%, and 79.62% compare to the industry averages of 12.92%, 6.59%, and 4.34%, respectively.

POWR Ratings Reflect Bleak Prospects

PTON’s overall F rating equates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. PTON’s beta of 1.69 justifies its F grade in Stability, and its F grade for Sentiment is in sync with its weak revenue and earnings growth estimates.

Furthermore, it has a D-grade for Value, consistent with its premium valuation metrics. Its D grade for Quality is reflected in its lower-than-industry profitability.

PTON is ranked #57 out of 59 stocks in the C-rated Consumer Goods industry.

Beyond what I have stated above, we have also given PTON grades for Growth and Momentum. Get all PTON ratings here.

Bottom Line

As sales slumped and costs mounted, PTON incurred huge losses in the fiscal first quarter. The stock is currently trading below its 200-day moving average of $13.93. Also, near-term demand for connected fitness hardware is likely to remain weak amid macroeconomic uncertainties.

So, given its disappointing financials, unfavorable analyst estimates, stretched valuation, and lower-than-industry profitability, it could be wise to avoid the stock now.

How Does Peloton Interactive, Inc. (PTON) Stack up Against Its Peers?

PTON has an overall POWR Rating of F, equating to a Strong Sell rating. One might consider investing in other Consumer Goods stocks with an A (Strong Buy) or B (Buy) rating, such as Ennis, Inc. (EBF), Kimberly-Clark de México, S. A. B. de C. V. (KCDMY), and Mannatech, Incorporated (MTEX).

PTON shares were trading at $11.77 per share on Friday afternoon, down $0.80 (-6.36%). Year-to-date, PTON has declined -67.09%, versus a -15.55% rise in the benchmark S&P 500 index during the same period.

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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