Peloton trades at $7.50 and has moved in lockstep with the market. Its shares have returned 19.4% over the last six months while the S&P 500 has gained 22.9%.

Is there a buying opportunity in Peloton, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.

Why Do We Think Peloton Will Underperform?

We're swiping left on Peloton for now. Here are three reasons you should be careful with PTON and a stock we'd rather own.

1. Decline in Connected Fitness Subscribers Points to Weak Demand

Revenue growth can be broken down into changes in price and volume (for companies like Peloton, our preferred volume metric is connected fitness subscribers). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Peloton’s connected fitness subscribers came in at 2.8 million in the latest quarter, and over the last two years, averaged 2.1% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Peloton might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.

2. Operating Losses Sound the Alarms

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Peloton’s operating margin has been trending up over the last 12 months, but it still averaged negative 10.9% over the last two years. This is due to its large expense base and inefficient cost structure.

3. Cash Flow Margin Set to Decline

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the next year, analysts predict Peloton’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 13% for the last 12 months will decrease to 11%.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of Peloton, we’ll be cheering from the sidelines. That said, the stock currently trades at 751× forward P/E (or $7.50 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at the most dominant software business in the world.

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