Peloton (NASDAQ: PTON) has wowed the market with its fourth-quarter results, sending its shares up nearly 50% in two days. This suggests a dynamic change that could push the price higher in the quarters and years to come. However, the details in the report also suggest headwinds that could limit gains today; a sustained rally is unlikely this year. The conclusion is that investors looking to initiate or add to a position have received the signal they have been waiting for, but should be cautioned to wait before committing to this discretionary stock.
Among the causes of Peloton’s sharp price increase are short selling. Short selling was nearly 20% in the last report and is unlikely to have fallen prior to the report. The likely scenario is that short sellers have closed their positions or are closing them but are not changing their stance. The likely scenario is that short sellers are repositioning at the new highs, which coincide with the top of a trading range and a critical resistance target. This target coincides with the lower bound of the price gap formed in February when the company warned that large-scale growth was difficult.
Peloton makes progress in sizing and returns to growth
Peloton had a better-than-expected, but not great, quarter. The company generated net revenue of $643.6 million, beating consensus by 370 basis points, but grew only 0.2% year over year. The return to growth is good and ahead of schedule, but is unlikely to accelerate next year even if it can be sustained (the guidance says it won’t). Product sales are down 4%, but that was offset by an increase in subscriptions driven by growth in the after-sales and secondary market. Total subscriptions increased 2.3% and had low churn, offset by a significant decline in paid app subscriptions.
Another highlight of dubious quality is the margin news. The company was able to improve its gross margins due to strength in the higher margin subscription segment and further compounded that improvement with reduced costs. The bottom line is a significant reduction in net losses, but net losses remain and negatively impact the balance sheet. The good news is that the GAAP loss of $0.08 is tenths below forecasts and the company has achieved positive free cash flow, which is expected to continue.
Guidance is another sticking point for the market. The company has issued positive guidance compared to consensus estimates reported by MarketBeat, prompting upward revisions, but Q1 and FY revenue guidance points to another year of contraction. As it stands, Q1 guidance calls for a 4% year-over-year decline, which is expected to accelerate over the rest of the year; full-year revenue guidance calls for a 10% decline.
Peloton cuts costs at the expense of shareholders
Peloton is well capitalized and not in danger of bankruptcy anytime soon, but there are reasons for concern. The company reduced its debt load during the quarter, improving its cash flow metrics, but net income for the period is dilutive for investors. Not only has the shareholder deficit increased by 75%, but the share count has also increased by 5%, and both are expected to increase again in fiscal 2025. Executives say they are looking for ways to use their newly freed-up cash flow; they should start paying down debt.
Analyst reaction to the news is lukewarm. While most revisions include an increased price target, their consensus is lower than before the release and below the current price action, suggesting the stock is already overpriced. In this scenario, Peloton cannot overcome its current resistance without an additional catalyst, which will likely be the next earnings report due in November. Until then, investors should expect a price pullback that could lead to a retest of the lower end of the range at $3.50. Support should be stable at this target or higher, as institutional activity is bullish at this level.
Source MarketBeat
