Peloton is free cash flow positive, and could generate nearly $200 million in annual cash profits in a few years.
Peloton Interactive (PTON 9.43%) investors had a crazy week. The stock slipped 22% on Thursday after Peloton reported its CEO is stepping down and it missed on Q3 2024 sales, while reporting positive free cash flow (FCF). However, it rebounded later that day, even as Wall Street weighed in with (mostly negative) comments on the report. Pelton is now down 5% since the report.
Multiple analysts cut their Peloton price targets Friday, among them BMO Capital‘s Simeon Siegel, who lowered Peloton from $7.50 to $6.50 per share. That’s the bad news.
The good news is that if Peloton goes even to $6.50 per share … it will be a 90% gain from Friday’s closing price.
Is Peloton stock a buy?
Peloton suffered a 1% year-over-year decline in “members” in Q3 and a 21% plunge in “paid app subscriptions,” but revenues fell only 4%. And Peloton reduced its losses by 39% compared to last year’s Q3, while reporting $8.6 million in FCF. Management said it’s laying off 15% of its workers as part of a plan to cut costs by $200 million annually, with the goal of generating more “meaningful” free cash flow in 2025. At the same time, management said it will spend on marketing to “increase engagement with new targeted audiences and drive more efficient growth at scale.”
That’s what worries BMO’s Siegel — the risk Peloton’s quest for scale turns into a growth-at-any-cost strategy to the detriment of free cash flow. The analyst suggests Peloton would be better off “bear-hugging brand loyalists, enjoying healthy CF generated by [high margin] subscriptions,” rather than chasing new customer growth.
That sounds like the right plan. If you’re considering an investment in Peloton, watch free cash flow closely. GAAP earnings at this fitness stock are expected to remain negative through 2031, which could scare off a lot of investors. But FCF could approach $200 million in 2028, and might do even better if the cost-cutting plan works.
At $1.3 billion in market cap today, that’s only a 6.5x multiple to FCF — cheap if FCF grows as promised.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Peloton Interactive. The Motley Fool has a disclosure policy.
