It's been a difficult few years for Peloton Interactive (NASDAQ: PTON) , to say the least. The company ended 2020 with a share price of nearly $152 and a reputation as one of the hottest stocks on the market. Today, shares hover around $3.50, down 98% from their all-time high, and Peloton serves as a case study for companies that fell victim to a pandemic hangover.
Meanwhile, management's recovery efforts may have just gotten even more difficult with three popular instructors set to leave the platform by the end of the month.
Peloton's problems continue to mount
At their core, Peloton's issues stem from how severely management overestimated the company's growth prospects. During the early months of the pandemic, Peloton saw surging demand for its exercise equipment since people had no choice but to work out at home. But instead of permanently boosting the growth trajectory for the business, the pandemic only pulled demand forward. As management ramped up spending and made plans to open a new manufacturing facility in the U.S., Peloton's profitability began to plummet.
The company ended 2020 with a gross margin of 35.3% for its connected fitness products (fitness equipment). A year later, it had fallen to 6.5%. Before long, gross margin fell into negative territory, meaning Peloton was losing money on every treadmill and exercise bike it produced.
Following major leadership changes, layoffs, and other cost-cutting initiatives, Peloton has managed to return to positive gross margins this fiscal year. For its fiscal 2024 third quarter (ended Mar. 31), product gross margin was 4.2%, marking its third straight positive quarter.
Despite that improvement, the company has had trouble growing its c onnected fitness subscriptions. Last quarter, the company had 3.056 million subscribers, flat from the year-ago period. And paid-app subscribers, which include users who do not own one of Peloton's connected fitness products, fell 21% year over year to 647,000.
Subscription numbers could be facing additional headwinds with reports that three popular instructors are set to leave the platform. Kristin McGee and Ross Rayburn, from its yoga division, and Kendall Toole, who teaches treadmill classes, will be leaving by the end of June. Peloton said these departures were due to a breakdown in contract negotiations.
These instructors have hundreds of thousands of devoted followers, so it wouldn't be surprising to see the company lose some subscribers following their exit from the platform. As far as a silver lining goes, the loss should save the company some money since top instructors are rumored to be paid as much as $500,000.
The company continues to rein in spending, and management announced a restructuring plan in May to reduce costs by $200 million annually. Most of the savings will come from a 15% reduction of its workforce and a downsized retail-showroom footprint.
Last quarter, Peloton was able to generate positive free cash flow of $8.6 million, the first time in 13 quarters. However, it has still seen negative free cash flow of nearly $112 million through the first three quarters of fiscal 2024.
Image source: Getty Images.
Where does Peloton stock go from here?
Peloton's recovery has struggled, and ongoing cost cuts are likely to hamper any return to growth. These latest instructor departures represent yet another setback for that effort.
That said, management's push to improve cash flow is important as it carries significant debt on its balance sheet, including $991 million in convertible notes (due 2026) and a $700 million term loan (due as early as 2025). Meanwhile, it has $795 million in cash and equivalents.
With Peloton valued at less than half its trailing-12-month revenue, it may appeal to some investors as a turnaround play, but there is just too much uncertainty around the company.
Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Peloton Interactive. The Motley Fool has a disclosure policy .
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