Peloton Interactive (NASDAQ:PTON) shares endured a rough week last week. Even with the 11% bounce on Friday, the closing price of $27 still reflects an 83% fall over the past one year period. There are various reasons for the fall from grace, but the point we want to focus in on is whether there is fundamental value in buying now, given the potential discount it trades at.
Issues at the moment
Firstly, let’s briefly run through why the Peloton share price was in focus again last week. Media reports surfaced claiming that the company was halting production for up to six weeks due to low demand for the products. Even though these reports were denied, Peloton CEO John Foley did come out and say that the business was reviewing the size of the workforce, the strategy and other key points relating to the future of the brand.
The production halt speculation saw the share price drop 25% intraday, before having a bounce on Friday. Ultimately, shares ended the week lower than where it started. For us, this is a clear sign that even if production news is somewhat overstated, there are concerns to be cognizant about.
The broader fall over recent months comes after Peloton posted worse than expected results for recent quarters. For example, in the fiscal Q1 2022, revenue was up 6% year-on-year, but unfortunately expenses came in much higher, causing a loss. Gross profit in Q1 was $262.7mn representing a 20% year-over-year decline.
The issue here is that if demand is now falling (i.e lower revenue) then it’s going to be virtually impossible off the back of those recent figures to try and claw back a profit.
A landing ground for Peloton shares
Clearly, unless you think that Peloton is going to go bust, there will be a floor in the share price at some point. Two important levels catch our attention. Firstly, at the start of 2020 (just before the pandemic kicked off), Peloton shares traded in a $20-$30 range. So at $27 currently, this means there is no pandemic premium built in. For us, this is a positive sign. There’s no speculative pump in the price on the expectation of further pandemic driven demand.
Another important level is $29. This was the IPO price back in September 2019. So to consider that the stock now trades below this level is also worth noting. Is the business really worth less than it was before the pandemic began? We doubt it. Even with a rather bleak outlook, the value of the company is within the intellectual property, the distribution and the client data that it owns.
From our point of view, we think that Peloton shares are nearing the bottom, based on the above two levels. However, the market is clearly very jittery at the moment. Therefore, we are happy to wait on the sidelines for a while to see how things play out before deciding whether to make an investment. We also think there might be better options in the short term.
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