Peloton has 'a $500 million unused revolver,' analyst says

·3 min read

Peloton (PTON) continues to have a rough go as the company’s stock has been unable to return to a point anywhere near mid-pandemic peaks amid its transformational turnaround. The American exercise equipment and media company’s recent fiscal Q3 2022 earnings miss did not do the company any favors either.

In spite of the uncertainty and doubt surrounding Peloton from experts, from concerns regarding its hardware to its current level of capitalization, Citi (C) internet sector senior analyst Ron Josey believes that the company’s value proposition and innovation position it well for the future.

“I think they did have a pretty big net loss on free cash flow for the quarter,” Josey told Yahoo Finance Live. “... But frankly, what Peloton is doing overall in terms of innovating and really defining the call it connected fitness market, and merging both the bike or the hardware with the experience, that's something that not many others are doing at that level and scale. And so in our view, there's a lot of value to what Peloton is doing.”

Josey joined Yahoo Finance Live to assess Peloton's Q3 earnings, subscriber growth, pricing on subscription services and equipment, and the company's hardware and content. Peloton reported fiscal third quarter sales of $964.3 million — below the consensus forecast of $971 million — as well as an adjusted EBITDA of $194 million against analyst estimates of $132 million.

Forward guidance for the next quarter also disappointed, with Peloton forecasting sales of $675 million to $700 million and adjusted EBITDA of -$115 million to -$120 million against consensus estimates of $820 million and -$19 million, respectively.

However, Josey pointed to dynamics behind Peloton’s subscriber base as reason for why he maintains a bullish outlook.

“Our bullish stance is based on a few things. But the first, most important thing for us is on the subscriber side,” he said. “So it's knowing that they're adding subscribers, that engagement is improving. I think the average member works out with Peloton about 19 times a month. And so from a product-market fit perspective, it seems like they have everything.”

Peloton’s ongoing turnaround

Peloton CEO Barry McCarthy, whose tenure began around three months ago, recently told analysts during his first post-earnings conference call with Peloton that he was surprised at how deep the company’s issues ran when he first stepped up to the plate. He described problems with the company’s supply chain and cash flow situation.

Peloton also recently signed a deal with JPMorgan Chase (JPM) and Goldman Sachs (GS) to borrow $750 million in five-year term debt. The company’s lackluster performance has left it with light pockets and the cash injection will serve to alleviate capitalization issues as it looks to get back on track.

"So [McCarthy] did say that he has no intention of diluting shareholders," Aneesha Sherman, AllianceBernstein (AB) vice president of apparel and specialty retail, told Yahoo Finance Live. "They just raised $750 million of debt. They have a $500 million unused revolver. I think it's about cash flow buffer in an environment where supply chain logistics, storage of these bikes is getting more and more expensive. And that cost is unpredictable. So I think it's back to the hardware."

And in light of Peloton’s struggles, acquisition by a major player in the tech industry may not be entirely out of the question, according to Josey.

“With the incremental $750 million that they raised via debt, their balance sheet is certainly shored up so that they can continue doing what they're doing,” he said. “And in terms of acquisitions from other companies, I think there's a slew that are out there, and you can imagine who they are. I think we've spoken about them in the past, some of the largest consumer device manufacturers out there and then some.”

Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter @thomashumTV

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