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As top trainers leave Peloton, the future of the stock remains uncertain

These were difficult 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 are around $3.50, 98% below their all-time high, and Peloton serves as a case study for companies that fell victim to a pandemic hangover.

Meanwhile, management’s turnaround efforts may have become even more difficult, with three popular trainers set to leave the platform by the end of the month.

Peloton’s problems continue to grow

At the core, Peloton’s problems stem from management’s gross overestimation of the company’s growth prospects. In the early months of the pandemic, Peloton experienced a surge in demand for its exercise equipment as people had no choice but to work out at home. But instead of permanently boosting the company’s growth trend, the pandemic only drove demand up. As management increased spending and made plans to open a new manufacturing facility in the U.S., Peloton’s profitability began to decline.

The company ended 2020 with a gross margin of 35.3% for its connected fitness products (gym equipment). A year later, it had dropped to 6.5%. It didn’t take long for the gross margin to slip into negative territory, meaning Peloton was losing money on every treadmill and exercise bike it produced.

After major leadership changes, layoffs and other cost-cutting measures, Peloton has managed to return to positive gross margins this fiscal year. In the third quarter of fiscal 2024 (ended March 31), the product gross margin was 4.2%, marking the third consecutive positive quarter.

Despite this improvement, the company had problems inConnected fitness subscriptions. The company had 3.056 million subscribers last quarter, unchanged from the same period last year. And paid app subscribers, which include users who don’t own any of Peloton’s connected fitness products, fell 21% year over year to 647,000.

Subscriber numbers may come under further pressure following reports that three popular trainers are leaving the platform. Kristin McGee and Ross Rayburn from the yoga department and Kendall Toole, who teaches treadmill classes, will leave the platform by the end of June. Peloton said the departures were due to a breakdown in contract negotiations.

These trainers have hundreds of thousands of loyal followers, so it wouldn’t be surprising if the company lost some subscribers following their exit from the platform. One silver lining is that the loss should save the company some money, as top trainers are rumored to earn up to $500,000.

The company continues to rein in spending, and management announced a restructuring plan in May that would cut costs by $200 million annually. The bulk of the savings will come from a 15 percent reduction in workforce and a reduction in retail space.

Last quarter, Peloton was able to generate positive free cash flow of $8.6 million for the first time in 13 quarters. However, the company still reported negative free cash flow of nearly $112 million through the first three quarters of fiscal 2024.

Person riding a Peloton bike at home. Person riding a Peloton bike at home.

Person riding a Peloton bike at home.

Image source: Getty Images.

What’s next for Peloton stock?

Peloton’s recovery has been difficult, and ongoing cost-cutting is likely to hamper a return to growth. The recent departures of trainers represent a further setback to these efforts.

Still, management’s push to improve cash flow is important because the company has 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). In addition, the company has $795 million in cash and equivalents.

With Peloton’s value estimated at less than half of its last 12-month revenue, It may be an attractive turnaround opportunity for some investors, but there are simply too many uncertainties surrounding the company.

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Geoffrey Seiler does not own any stocks mentioned. The Motley Fool owns and recommends Peloton Interactive. The Motley Fool has a disclosure policy.

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