Over the last year, Peloton Interactive, Inc. (NASDAQ: PTON) has been transitioning into a subscription business model instead of relying on its hardware sales. This could be an excellent move for the business since subscription models offer a higher profit margin. However, there is a litany of issues plaguing the company, including but not limited to a post-pandemic relapse, mass recalls due to safety concerns, mounting debt, and a $75 million settlement strangling its cash flow. This cacophony of cascading complications is the reason why shorting PTON stock could prove to be a profitable decision – especially with its 2023 annual report set to be released on August 24.
PTON Fundamentals
New Management Old Vision
PTON’s new management’s transition to a subscription business model was a step in the right direction for the early years of the pandemic, which favored subscription models over traditional retail options. This transition occurred in March 2022 and resulted in PTON’s revenue from subscriptions to rise 15% YoY, however, its victory did not last long. Shortly afterward, its management projected that the company is likely to experience a loss in subscriptions in Q4 2023.
This could be the start of a worrying trend since plateauing subscriptions could be catastrophic for companies with a subscription model. A prime example of this is Netflix which fell 39% after losing subscribers in Q1 2022. Since PTON’s own management is projected to lose subscribers, the results could be doubly worrying.
Stock movement aside, subscriptions make up 56% of PTON’s revenue. A loss in subscriptions will drastically affect the company’s ability to raise revenue, which in turn offsets its projections toward profitability substantially.
The reason for PTON’s expected loss of subscribers is likely partially due to inflation and a return to normalcy in a post pandemic world. According to the Kearney consumer institute, there is a steep decline in the subscription market post pandemic due to inflation. According to its surveys, around 40% of consumers think they have too many subscriptions. Additionally, they found that overall consumers were spending about $38 per subscription – amounting to $200 per month during the pandemic.
It is for that reason that more than half of the people in the survey want to decrease their subscription budget to under $50 per month. That said, PTON’s subscription is priced at $40 which, given the strain of inflation and its clients post pandemic free range lifestyle, may seem unreasonable. This shift away from a subscription oriented lifestyle is referred to as “The Great Unsubscribe” by Forbes.
In conclusion, if PTON were to have remained on its old hardware centered path it most likely would have suffered drastic losses due to mounting expenses and fewer sales. Having said that, the company’s subscription centered approach comes at a time when inflation is ravaging the country and its clientele is returning to a sense of normalcy after the pandemic, which is why things are not favorable for PTON Stock
Retailer Deals
PTON brokered deals with Amazon.com, Inc. (AMZN), and Dicks sporting goods (DKS). These deals allow both parties to sell PTON’s bikes – decreasing its inventory which provides it with cash and decreases logistics related expenses. Having said that, the deals may not be sufficient due to the sheer quantity of issues that the company is facing.
One of these issues is the fact that the market is likely saturated with PTON’s bikes due to its record sales in the early years of the pandemic. This saturation is not favorable for the company because its products are mostly one time purchases. In other words, the likelihood of a resurgence of hardware sales is slim which is especially worrying since its subscriptions are set to decrease in Q4 2023 according to management’s expectations. Not to mention the recall of 2.2 million bikes earlier this year that is impacting the company negatively from a fiscal and reputational standpoint.
Drifting Away From Breakeven Target
Currently, PTON’s management is attempting to increase its cash flow by cutting down on expenses that would limit growth. Due to these internal budgetary restrictions, the company experienced a remarkable 92% YoY reduction in expenses.
Despite this reduction, the company is in a tough spot. Overall, PTON seems to be veering away from its breakeven goal due to unanticipated factors like the $75 million settlement with DISH Network Corporation (DISH) over multiple patent infringements, which will likely pressure PTON’s $873 million cash balance.
Another factor is the recall of 2.2 million bikes due to safety hazards which will not only burden Peloton’s balance sheet but also burden its reputation as a luxury exercise equipment maker.
Bankruptcy Could Be On The Horizon
The bike recalls and the DISH settlement have put Peloton in an awkward position. The company has a standing debt of a $1 billion convertible note loan and a $690 million term loan due in 3 years which could pose a massive problem for it.
It is very unlikely that PTON would be given another zero-interest loan in the current interest rate environment, and the $873 million of cash on its balance sheet is not enough to pay off the $1 billion debt that matures in February 2026.
Its $1 billion zero-coupon bonds convert at about $239 a share, and at the stock’s current price, there is no incentive to convert. As a result, PTON will be required to pay the full $1 billion in February 2026 which the company will likely not be able to do since its expected decline in subscribers would lead to more losses for the company despite its cost reduction.
Additionally, the company’s debtors may not be enthusiastic about refinancing the debt due to the material risks facing the company’s existence in the long term due to the flaws of its business model even after shifting its focus to subscriptions. The reason for this is the management’s expectations of losing subscribers in Q4 which might be the start of PTON’s fall.
PTON’s debt-to-equity ratio is -13.2 since it has negative shareholder equity of $127 million which means that the company is a high risk investment and it may be better off seeking bankruptcy protection. As is, there is little to no upside for PTON Stock given its unclear and unstable future.
PTON does not have a lot of options and some of those available are pretty ugly. The most likely course for the company will probably be for it to stabilize its business in order to look attractive and await a white knight. If that does not occur, bankruptcy is the most probable course of action. Given its unclear and unstable future, investors may be better off steering clear of buying PTON stock while shorting it could prove to be a profitable decision, especially with its 2023 annual report set to be released later in August.
Technical Analysis
PTON stock recently exited its bearish trend and is now in a neutral trend, trading in a sideways channel between $6.75, and $8.38. Looking at the indicators the stock is above the 200, 50, and 21 MAs which is a bullish indication. Meanwhile, the RSI is neutral at 47 and the MACD is curling bullishly.
From a fundamental standpoint, PTON is not in a favorable position. Inflation and post pandemic life have led to a sizable decrease in consumers cutting down their subscriptions, which is likely the reason behind the company’s expectations regarding subscription loss in Q4 2023. Additionally, Peloton’s hardware purchases have likely saturated the market resulting in a decrease in hardware purchases. The icing on top of PTON’s diet cake, however, is its $1 billion debt which is larger than its current cash balance, and as a result, may cause PTON to resort to dilution or bankruptcy to restructure its business.
With that in mind, a possible play could be going short with an entry on retests of the $9 resistance and taking profits on retests of the 50 and 200 MAs as well as the $8 support.
PTON Forecast
As things stand, PTON is poised to take on drastic losses as a result of dwindling revenue brought about by a litany of reasons including inflation and post pandemic life negatively affecting subscriptions, crippling debt, safety concerns tarnishing its reputation, and its hardware sales decreasing likely due to saturation. Taking these factors into consideration, it is likely that the company will fall drastically in value or even go bankrupt which is why shorting PTON stock could prove to be a noteworthy decision.
PTON Fundamentals
New Management Old Vision
PTON’s new management’s transition to a subscription business model was a step in the right direction for the early years of the pandemic, which favored subscription models over traditional retail options. This transition occurred in March 2022 and resulted in PTON’s revenue from subscriptions to rise 15% YoY, however, its victory did not last long. Shortly afterward, its management projected that the company is likely to experience a loss in subscriptions in Q4 2023.
This could be the start of a worrying trend since plateauing subscriptions could be catastrophic for companies with a subscription model. A prime example of this is Netflix which fell 39% after losing subscribers in Q1 2022. Since PTON’s own management is projected to lose subscribers, the results could be doubly worrying.
Stock movement aside, subscriptions make up 56% of PTON’s revenue. A loss in subscriptions will drastically affect the company’s ability to raise revenue, which in turn offsets its projections toward profitability substantially.
The reason for PTON’s expected loss of subscribers is likely partially due to inflation and a return to normalcy in a post pandemic world. According to the Kearney consumer institute, there is a steep decline in the subscription market post pandemic due to inflation. According to its surveys, around 40% of consumers think they have too many subscriptions. Additionally, they found that overall consumers were spending about $38 per subscription – amounting to $200 per month during the pandemic.
It is for that reason that more than half of the people in the survey want to decrease their subscription budget to under $50 per month. That said, PTON’s subscription is priced at $40 which, given the strain of inflation and its clients post pandemic free range lifestyle, may seem unreasonable. This shift away from a subscription oriented lifestyle is referred to as “The Great Unsubscribe” by Forbes.
In conclusion, if PTON were to have remained on its old hardware centered path it most likely would have suffered drastic losses due to mounting expenses and fewer sales. Having said that, the company’s subscription centered approach comes at a time when inflation is ravaging the country and its clientele is returning to a sense of normalcy after the pandemic, which is why things are not favorable for PTON Stock
Retailer Deals
PTON brokered deals with Amazon.com, Inc. (AMZN), and Dicks sporting goods (DKS). These deals allow both parties to sell PTON’s bikes – decreasing its inventory which provides it with cash and decreases logistics related expenses. Having said that, the deals may not be sufficient due to the sheer quantity of issues that the company is facing.
One of these issues is the fact that the market is likely saturated with PTON’s bikes due to its record sales in the early years of the pandemic. This saturation is not favorable for the company because its products are mostly one time purchases. In other words, the likelihood of a resurgence of hardware sales is slim which is especially worrying since its subscriptions are set to decrease in Q4 2023 according to management’s expectations. Not to mention the recall of 2.2 million bikes earlier this year that is impacting the company negatively from a fiscal and reputational standpoint.
Drifting Away From Breakeven Target
Currently, PTON’s management is attempting to increase its cash flow by cutting down on expenses that would limit growth. Due to these internal budgetary restrictions, the company experienced a remarkable 92% YoY reduction in expenses.
Despite this reduction, the company is in a tough spot. Overall, PTON seems to be veering away from its breakeven goal due to unanticipated factors like the $75 million settlement with DISH Network Corporation (DISH) over multiple patent infringements, which will likely pressure PTON’s $873 million cash balance.
Another factor is the recall of 2.2 million bikes due to safety hazards which will not only burden Peloton’s balance sheet but also burden its reputation as a luxury exercise equipment maker.
Bankruptcy Could Be On The Horizon
The bike recalls and the DISH settlement have put Peloton in an awkward position. The company has a standing debt of a $1 billion convertible note loan and a $690 million term loan due in 3 years which could pose a massive problem for it.
It is very unlikely that PTON would be given another zero-interest loan in the current interest rate environment, and the $873 million of cash on its balance sheet is not enough to pay off the $1 billion debt that matures in February 2026.
Its $1 billion zero-coupon bonds convert at about $239 a share, and at the stock’s current price, there is no incentive to convert. As a result, PTON will be required to pay the full $1 billion in February 2026 which the company will likely not be able to do since its expected decline in subscribers would lead to more losses for the company despite its cost reduction.
Additionally, the company’s debtors may not be enthusiastic about refinancing the debt due to the material risks facing the company’s existence in the long term due to the flaws of its business model even after shifting its focus to subscriptions. The reason for this is the management’s expectations of losing subscribers in Q4 which might be the start of PTON’s fall.
PTON’s debt-to-equity ratio is -13.2 since it has negative shareholder equity of $127 million which means that the company is a high risk investment and it may be better off seeking bankruptcy protection. As is, there is little to no upside for PTON Stock given its unclear and unstable future.
PTON does not have a lot of options and some of those available are pretty ugly. The most likely course for the company will probably be for it to stabilize its business in order to look attractive and await a white knight. If that does not occur, bankruptcy is the most probable course of action. Given its unclear and unstable future, investors may be better off steering clear of buying PTON stock while shorting it could prove to be a profitable decision, especially with its 2023 annual report set to be released later in August.
Technical Analysis
PTON stock recently exited its bearish trend and is now in a neutral trend, trading in a sideways channel between $6.75, and $8.38. Looking at the indicators the stock is above the 200, 50, and 21 MAs which is a bullish indication. Meanwhile, the RSI is neutral at 47 and the MACD is curling bullishly.
From a fundamental standpoint, PTON is not in a favorable position. Inflation and post pandemic life have led to a sizable decrease in consumers cutting down their subscriptions, which is likely the reason behind the company’s expectations regarding subscription loss in Q4 2023. Additionally, Peloton’s hardware purchases have likely saturated the market resulting in a decrease in hardware purchases. The icing on top of PTON’s diet cake, however, is its $1 billion debt which is larger than its current cash balance, and as a result, may cause PTON to resort to dilution or bankruptcy to restructure its business.
With that in mind, a possible play could be going short with an entry on retests of the $9 resistance and taking profits on retests of the 50 and 200 MAs as well as the $8 support.
PTON Forecast
As things stand, PTON is poised to take on drastic losses as a result of dwindling revenue brought about by a litany of reasons including inflation and post pandemic life negatively affecting subscriptions, crippling debt, safety concerns tarnishing its reputation, and its hardware sales decreasing likely due to saturation. Taking these factors into consideration, it is likely that the company will fall drastically in value or even go bankrupt which is why shorting PTON stock could prove to be a noteworthy decision.