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More money has arrived
Peloton (NASDAQ:PTON) has successfully raised $750 million in debt from prominent investors including Blackstone and Apollo. According to Bloomberg, the debt had a >8% yield (6.5% + SOFR) as it was sold at a discount (95.5 cents on the dollar). Despite a final price at below par, the load received $1.5 billion in total orders as yield-seeking investors search for better returns. On the other hand, the borrowing amount has a floating rate, so Peloton could face higher interest expenses as interest rates continue to move up. Given the debt did not have a credit rating when sold, the interest rate would increase by 50 bp if Peloton cannot obtain ratings from either Moody’s or S&P Global in the next 6 months.
But not much has changed
While the capital market has thrown Peloton a lifeline as money is drying up quickly in a tightening environment, Peloton’s prospects remain severely challenged as the company struggled to make money even in its best years of 2020 and 2021 when demand for home exercise equipment skyrocketed.
In FY2021 (ending in June), the company more than doubled its revenue from $1.8 billion in FY20 to $4 billion. However, operating loss also more than doubled from $81 million to $188 million, while EPS worsened from -$0.32 to -$0.64.
In C1Q22, revenue fell by 24% to $964 million as Connected Fitness Products revenue dropped 42%. Gross margin of 19% was also a major step down from 35% in 2021. Although the company had 976,000 digital subscribers vs. 862,000 last quarter, average monthly workouts per subscription was down 28% with a 0.75% churn. On an adjusted EBITDA basis, Peloton lost $194 million vs. $63 million in C1Q21.
Peloton’s guidance for C2Q22 was underwhelming to say the least. The company expects revenue of $688 million at midpoint vs. $821 million consensus and adj. EBITDA -$118 million at midpoint vs. $-20 million consensus. Clearly, consumers would prefer to spend their gym time outside their homes now that the pandemic is almost over.
Avoid bottom-picking the stock
Peloton is a Covid stock. The company benefited from a sudden shift towards home fitness equipment as consumers were stuck at home trying to stay in shape. As the world returns to normal, demand for expensive indoor exercise bikes will continue to wane regardless of whether the company offers customers the option to pay for them over 39 months at 0% APR.
Some may praise Peloton’s subscription business and think more value can be unlocked by raising prices on subscribers as Peloton has a rather affluent customer base that is less price …….