Peloton stock surges 72% from August low; gets overbought

Peloton Interactive (PTON) is a company disrupting the fitness industry by using technology. The company sells advanced treadmills and exercise bikes and then provides a streaming platform where people can learn from experienced professionals.

Peloton became highly popular during the Covid-19 pandemic when governments shut down gyms, pushing many people to exercise at home. At the time, the company was caught off-guard by the soaring demand for its products. 

As a result, the management boosted production, raising its inventories from $266 million in June 2022 to $937 million and $1.1 billion in the next two financial years. The challenge is that by that time, demand for its equipment had risen and competition was robust. Peloton has changed its strategy and started to focus on the streaming business, which has higher margins.

Peloton’s stock has soared by over 72% from its lowest point this month, moving to its highest point since February. It was trading at $5 on Tuesday, while its HypeIndex score has soared by 200%.

Positive hype

• Peloton’s positive hype started when the company published its financial results on August 22nd.

• These results showed that the company was shifting its focus from growth to profitability.

• Its revenue in the quarter was $643 million, roughly unchanged from what it made in 2023 but down by 10% from its Q3’24 figure. These numbers, while weak, were higher than its guidance and what Wall Street was expecting.

• The company’s results showed that its focus on profitability was starting to bear results. Total net loss narrowed from $241 million in Q4’23 to $30.5 million in the last quarter. Its gross margin grew from 31.3% to 48.55, helped by its cost cuts. 

• Peloton Interactive’s subscription revenue has continued growing even as the number of subscribers fell a bit. This revenue rose by 2% to over $431 million.

• Therefore, the market is confident that Peloton can turn its business around and become a profitable company. 

• Further, Peloton could benefit from the actions of the Federal Reserve, which has committed to start cutting interest rates in its September meeting. High-risk companies do well when the Fed is cutting rates.

• Some analysts believe that Peloton is an undervalued company since it has a market cap of $1.8 billion. The average revenue estimate for 2024 is $2.51 billion. As such, as the company starts focusing on profitability, it can achieve a net profit margin of 20% like Netflix. 

• There are rumors that private equity companies are pursuing Peloton. With interest rates set to fall, there are chances that more private equity buyouts will happen since these companies have over $2.59 trillion in dry powder.

Negative hype

• Peloton’s subscriber growth has stalled, meaning that its business is no longer growing as it used to before. There is also fear that its churn will increase as customers reduce their subscriptions. 

• This slowdown is happening as the number of paid app subscribers dropped by 26% YoY to 615,000 and its average net monthly paid connected fitness subscription rose from 1.8% in 2023 to 1.9%.

• The waning role of its hardware sales will have a big impact on the company, especially if its subscriptions don’t grow. Its connected fitness product revenue dropped by 24% YoY to over $212 million.

• Analysts still have low expectations about the company, with the average stock target being $5.34, up slightly from the current $4.90.

Summary on Peloton stock

From a technical perspective, Peloton stock soared after the company formed a triple-bottom chart pattern at $2.91. In technical analysis, this is one of the most popular bullish patterns in the market.

The stock has moved above the triple-bottom’s neckline at $4.80 and the 100-day moving averages. This performance is a sign that bulls are in control and that the stock may have more upside.

However, oscillators like the Relative Strength Index (RSI) and the Stochastic have surged to their overbought levels. Therefore, the stock may retreat as some investors take profits and then resume the bullish trend.

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