Peloton stock price is risky but technicals point to a rebound

Peloton Interactive (NASDAQ: PTON) stock price has dived hard this year even amid optimism that it will become a takeover target by private equity companies. It has crashed by over 54% in the past 12 months and by 37% this year alone. A stock that was trading at almost $160 during the pandemic has crashed to $3.70 today. 

Weak fundamentals and high debt

Peloton Interactive has become one of the most popular fallen angels in Wall Street. Like many companies, it thrived during the Covid-19 pandemic and then crashed spectacularly when the hype died.

Peloton’s business model has always had important issues. Its model is to sell exercise equipment like treadmills and a riding bike. It initially sold these items exclusively but has now moved to other channels, including Amazon.

After selling the hardware, the company makes money through memberships where users subscribe to get exercising content. This model has some key headwinds, including the possibility of high churn among customers. 

The other headwind is that the fitness industry is highly competitive and that buyers of its hardware don’t buy new ones for a long time. 

All this explains why Peloton’s business has stalled in the past few years. The most recent results showed that the number of paid fitness subscribers stood at 6.6 million, a drop from 6.7 million a year earlier. 

Its total revenue stood at $717 million, down from $748 million while its net loss slowed to $167 million. While this improvement was welcome, it shows that the company faces a major challenge becoming profitable. Its free cash flow rose to over $6.6 million. 

Peloton ended the quarter with over $794 million, a drop from the $813 million it had in the same period. Most importantly, it is a highly indebted company with over $1.6 billion in long-term debt. In May, the company announced that it had closed on $1.35 billion refinancing in a bid to prevent dilution.

Peloton stock price forecast

PTON chart by TradingView

Peloton share price rallied in May after CNBC reported that several private equity companies were considering taking the company private. The report did not name these PE firms and the company has not updated about the nature of talks.

A potential acquirer would likely be interested in the company’s subscription business, which accounts for most revenues. However, I see no reason why such a deal makes sense because of the state the company finds itself in.

An acquisition would likely push the Peloton stock price significantly higher than where it is today. Besides, the stock has already formed a falling wedge chart pattern, which is one of the most positive signs in the market. It has also formed a double-bottom pattern.

Without a deal, Peloton stock’s outlook is bearish, with the next point to watch being at $2.88, down from the current level of $3.80. 

The takeaway is that while the stock has more downside, there is a possibility that it will have a short squeeze.