Peloton shares retreat to new low as shorts win

One month ago, Peloton Interactive, Inc. NASDAQ: PTON took news of a deal on Tik Tok to a four-month high of $7.42. We wondered if the former pandemic big flyer turned meme stock could keep up.

The answer appears to be a resounding no.

Shares of the fitness technology company fell to an all-time low of $4.10 on Friday, erasing recent gains and leaving investors wondering what’s next. The decline stemmed from a fiscal 2024 second-quarter earnings report that the market found less than exciting.

Revenue fell 6% year over year to $744 million, led by a 16% decline in connected fitness sales. One strong point, however, was the subscription business, which increased sales by 3% and accounted for 58% of total revenue. This reflected Peloton’s partnerships with third-party retailers such as Dick’s Sporting Goods and Amazon.com. Another bright spot, thanks to a significant drop in operating expenses, was the increase in gross margin to 40.3%.

Ultimately, though, that wasn’t enough to stop the company from posting another quarter of steep losses. A net loss of $0.54 per share was in line with consensus, but brought Peloton’s accumulated deficit to nearly $5.3 billion. Based on management’s lowered fiscal 2024 outlook, Peloton won’t be able to climb out of this hole anytime soon.

Full-year revenue is now expected to be approximately $2.7 billion, which would be a step down from the $2.8 billion generated in fiscal 2023. The projection suggests that the strategy Peloton’s turnaround is struggling to gain traction two and a half years after its damaging Tread+ treadmill. call back.

Its shortcomings are especially disappointing, considering the $90 billion global fitness subscription market is ripe for a technological disruption. While Peloton’s subscription business is improving, the urgent need to spend on new product development and marketing will make it difficult to turn a profit in the years to come.

What is the short interest in PTON?

As losses continue to mount for Peloton, PTON short sellers are racking up gains. Incredibly, the stock is down 97.5% from its January 2021 peak. Bears who jumped on TikTok’s January 2024 surge as a short opportunity could be up more than 40%.

Peloton’s financial difficulties and inability to sustain a stock rally have made it a popular short-selling target in recent years. PTON has failed to string together more than two consecutive months since its remarkable nine-month winning streak in 2020.

A short sale involves borrowing shares of stock and selling them on the open market in the hope of buying them back at a cheaper price. When the shares are returned to a broker, the price differential (minus any interest on the loan) constitutes the short seller’s profit.

Despite PTON’s disappointing performance and penny stock price, short sellers continue to bet against it. About 18% of Peloton’s 313 million share float is held short. While bullish traders maintain faith in a short squeeze rally, bearish sellers continue to laugh all the way to the bank. Will this model continue?

What is Wall Street’s updated take on Peloton?

Wall Street’s reaction to Peloton’s latest bombshell news has been mixed. Most analysts took a neutral stance on the depressed stock after the quarterly update. Five called it a buy and two thought it was still a sell.

As usual, sell-side price targets on PTON are everywhere. Oppenheimer thinks it could hit $20.00 in the next 12 months. Morgan Stanley sees the stock slip to $3.00. The average analyst price target from the fiscal second-quarter report is $7.34, implying an upside of about $3.00 from Friday’s close.

One reason – and perhaps the best reason – to take a bullish position on PTON is to speculate on an acquisition. The company’s base of 6.7 million fitness-loving members is growing. It could be an attractive asset for an apparel company like Nike or Lululemon or a consumer technology company like Apple, especially with a market cap of just $1.5 billion.

Another reason to try betting on PTON is its chart. Oversold technical conditions occurred following last week’s sell-off. On the daily chart, the relative strength indicator (RSI) reading is among the lowest on the Nasdaq. At the very least, there could be a “dead cat” bounce in the short term.

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