Peloton update - 6 months later

What's next and price targets

When I wrote my Peloton long thesis back in August when the stock was $3 a share I focused on three core bullish points. First, that the name was being price for bankruptcy. It might not have seemed like that just from a quick three minute scan, but without a CEO and a stock that hadn’t gone up it years, the market had left it for dead and stopped paying attention to it. Leaving it trading at less than .3x worst case NTM sales. That created opportunity. One we took advantage of and have close to 3x’d the initial investment as the market has removed much of the bankruptcy risk and pushed them to 1x sales.

The second was the EBITDA numbers were going to go through the roof due to massive cost cutting measures that had already started. Peloton had been spending the largest percentage of revenue on marketing than anyone else in the same business as them by a factor of five. Even after significant cost cuts, they’re still spending the most in the fitness sector/space as a percentage of revenue, with second place no where close to them. These cost cuts had already happened by the August report, which is why EBIDTA beat to the upside and the guide was much higher than expected.

EBITDA has continued to move higher after the following two quarters and by the time we finish out the next FY, its likely that at $3 we will have bought Peloton at slightly over 2x forward EBITDA. Peloton’s cost cutting measures have continued more than six months later, and they seem to continue to eradicate needless spend further pushing up EBIDTA. This is an exciting prospect right now, but we should start to see diminishing returns on the cost cutting as management finishes up with the low hanging fruit. I do not expect much more positive EBIDTA movements via spend reduction that what we can already model. The unexpected upside here is limited.

Third I focused on debt paydown and FCF. Given the removed costs from cutting spend and doing layoffs their FCF was about to go from negative infinity to positive. Now likely heading eventually over a TTM $500mm run rate that should begin sometime in the next six quarters. The be lever here, outside of cost cutting is deleveraging of debt. The Soros debt will be converted in under two years from now, that adds 70 - 100mm of FCF depending on where yields are when the conversion takes place. Leaving management only with the floating rate issuance on the books and some ancillary debt via a revolver. All of which becomes more manageable as more debt is paid down. This has been a real win, and why the stock price has risen so fast. FCF growth will likely continue through this year before slowing somewhat in CY 2026.

All of the central thesis of the original post and video has worked out. I put a price target of somewhere between $9 - $15 a share. A range its now flirting with and had traded in for a decent chunk of the last three months.

Given that their debt is floating rate, they were trade inverse of rates somewhat, which is why they’ve been weak the last month+ into the earnings print as the yield curve pushed higher and higher.

The $9 - $15 was the ‘this company isn’t a zero’ level. The wide range given because we don’t know what natural run rate of EBIDTA and FCF they will settle at, and more importantly, what their churn rate will look like in the upcoming quarters. It also depends on what SOFR rates are, as their debt is floating. Lower rate = closer to $15 we go.

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So that’s where we are today, just under $9 a share, with a new CEO, Peter Stern, driving the company forward, and the market trying to figure out what to value this company at.

The obvious money on Peloton has been made as they aren’t a zero. Now management needs to show cost discipline while figuring out ways to restart user growth, grow the LTV/CAC ratio, and grow revenue with less spend. They have a few easy options to fix some of these. The faster these metrics grow, and the larger the potential end target of these metrics gets, the more the stock price goes up. Suddenly the $15 price target can move quickly to the mid $20s if user growth goes from a churn of 1% to a positive 2% all while limiting costs.

Let’s talk about ways I think they will approach fixing these metrics, if I view the fixes as bullish or bearish and potential upside they could add.