It would be hard to envision three years ago. Yet, as we sit here today, shares of Peloton Interactive (PTON -1.26%) are down 98% from all-time highs set back in 2021. The at-home fitness giant has seen its fortunes dwindle, with the share price down to a measly $3 as of this writing. It has seen stagnating subscriber growth, continues to lose money, and has a teetering balance sheet that just got refinanced.
What happened to Peloton stock? And what can investors learn from it? Let's take a closer look and find out.
Back to growth, but more losses abound
Last quarter, Peloton's financials looked similar to the last few years, which is not a good thing. Subscriber numbers are stagnating, with paid-fitness subscriptions at slightly over 3 million, flat year over year and up 2% quarter over quarter. With equipment revenue dropping, Peloton's overall sales fell yet again in the quarter, down 4% year over year to $717 million.
Things get worse as you move down the income statement. With over $450 million in operating expenses as well as interest expenses on its debt, the company had another period of net losses. It lost $166.7 million in the quarter, which no investor should be happy about. The company has posted negative free cash flow and net income every trailing-12-month period since the end of 2021, which shows how impaired Peloton's business is.
Fitness equipment is a tough industry, going through major booms and busts for many brands. People who love exercising also love trying new fads when they come into popularity. Peloton was popular for a few years but has since lost its luster among customers. This continues to show up in its financial statements.
Don't forget balance sheet troubles
Perhaps even worse than Peloton's income statement -- if that's even possible -- is its balance sheet. It has a negative stockholder's equity, meaning it has more liabilities than assets. This shouldn't be surprising given all the money it has lost over the past few years.
At the end of last quarter, Peloton had around $800 million in cash. However, it also had $1 billion in convertible bonds and $692 million in term loans. After the quarter ended, the company refinanced its debt by doing a 5.5% interest rate convertible bond worth $300 million. It used this and cash on hand to pay back its existing convertible bond.
Its old convertible bond had a 0% interest rate. Now, it will be paying 5.5% annual interest on this new debt, raising its total annual-interest expense. This will be a further headwind to Peloton generating any sort of profits in the coming years, which it needs to do in order to pay back these loans or risk running out of cash.
It is no wonder that CEO Barry McCarthy just resigned his role at the company. Peloton has real liquidity issues that may not be solvable.
PTON Free Cash Flow data by YCharts.
Should you buy the dip?
To keep it simple: No, you should not buy the dip on Peloton stock. It has a bad balance sheet, has no signs of growth, and can't generate a profit. There are no redeeming qualities to Peloton's business right now, and it could easily file for bankruptcy within a few years, if not sooner.
What can investors learn from the Peloton stock story? I think it is imperative that investors don't fall in love with new, fast-growing brands in the fitness space. Investors were pricing in Peloton like it would hit 30 million subscribers by 2024, and it has 10% of those numbers today. It also is a warning to avoid stocks with bad balance sheets, especially ones that are burning cash.
Instead, investors should buy blue chips for their portfolios. Don't mess around with Peloton stock -- this company is not headed in the right direction anytime soon.
