I think it is overly optimistic to assume Peloton will vastly increase its market share given the current market landscape, supply chain issues, and significant price and subscription changes, while also achieving its highest ever margins. Of competitors with publicly available sales data, iFit Health, owner of NordicTrack and ProForm, Beachbody (BODY), and Nautilus (NLS) held, respectively, 9%, 6%, and 4% of the TAM in 2020. For reference, Peloton’s share of its TAM in calendar 2020, or before the major pandemic boost, was just 13%. At $12.4 billion, Peloton’s revenue would imply a 17% share of its total addressable market (TAM) in calendar 2027, which I consider the combined online/virtual fitness and at-home fitness equipment markets. In this scenario, Peloton would generate $12.1 billion in revenue in fiscal 2028, which is over 3x its TTM revenue and 7x its fiscal 2020 revenue. The stock would be worth $11/share today – equal to the current stock price.
revenue grows 16% compounded annually through 2028, then.NOPAT margin immediately improves to 1.7% (Peloton’s best-ever margin, compared to -30% over the TTM) and.I also provide an additional scenario to highlight the downside potential in shares if Peloton’s revenue grows at more reasonable rates. Reverse DCF Math: Peloton Is Priced to Triple Sales Despite Weakening Demandīelow I use my reverse discounted cash flow (DCF) model to analyze the future cash flow expectations baked into Peloton’s stock price. Peloton’s fiscal year ends June 30 of each calendar year. PTON Cumulative FCF Burn New Constructs, LLCĪnnual dates represent fiscal year.
#BUY BURN ZOMBIE BURN FREE#
If I assume the average FCF burn over the past two years, and include the additional capital raised a month ago, Peloton only has 11 months left of cash before needing to raise more capital or go out of business.įigure 2: Peloton’s Cumulative Free Cash Flow This new cash can keep the company afloat for three month’s, based on TTM cash burn rates. Additionally, the debt is structured to make it more expensive for Peloton to repay during the first two years. The debt is extremely creditor friendly, as it bears an interest rate of 6.5 percentage points above the Secured Overnight Financing Rate (currently equal to 1.45%) and will increase by 50 basis points if Peloton chooses not to get the debt rated by one of the major credit rating agencies. Similar to the situations above, Peloton raised $750 million in a five-year term loan in May 2022 to help shore up its balance sheet. With just $879 million in cash and cash equivalents on the balance sheet at the end of fiscal 3Q22, Peloton’s cash balance could keep the company afloat for just over three months from the end of its fiscal 3Q22. Peloton burned through $3.3 billion in FCF over the TTM ended fiscal 3Q22. Since then, Peloton has burned through $3.7 billion in FCF, per Figure 2. Peloton’s issues are well telegraphed – given the stock’s decline over the past year – but investors may not realize that the company only has a few months worth of cash remaining to fund its operations.ĭespite rapid top-line growth, particularly in 20, Peloton’s free cash flow (FCF) has been negative every year since fiscal 2019. Even after falling 92% from its 52-week high, 73% YTD, and 74% since my most recent report in February 2022, I think the stock has much more downside. Since my original report, the stock has outperformed the S&P 500 as a short by 91%. I put Peloton (PTON) in the Danger Zone in September 2019, prior to its IPO and have reiterated my negative opinion on the stock many times since. With these stocks, overvaluation risk is stacked on top of short-term cash flow risk.īelow, I’ll take a closer look at Peloton and detail the company’s cash burn and how much further its stock price could fall.
For the riskiest zombie companies, not only does the stock price not reflect the short-term distress facing the company, but it also reflects unrealistically optimistic assumptions about the long-term profitability of the company. Stock valuations that embed high expectations for future profit growth add more risk to owning shares of zombie companies with just a few months’ worth of cash left.
I then divide Cash and Equivalents on the balance sheet through 1Q22 by monthly cash burn.Īnd Overvalued Zombie Stocks Are the Riskiest To calculate “Months Before Bankruptcy” I divided the TTM FCF burn by 12, which equals monthly cash burn. These stocks have a real risk of going to zero. Companies such as Carvana, Freshpet FRPTand Peloton have less than six months of cash on their balance sheets based on their FCF burn over the past twelve months. Not surprisingly, the companies that are most at risk of seeing their stock price go to $0 are the ones with a poor underlying business model, which was overlooked by investors during the 2020-2021 meme stock-driven market frenzy.
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