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Peloton Stock Offers Minimal Safety Margin Even at These Levels

Slowing demand, and no profits are key reasons Jonathan Heller's staying off this ride.

The start of the new year hasn’t been kind to investors – not with the S&P 500 down 7.7% and the Russell 2000 Index off 11.4%.

Even worse is the Russell 2000 Growth Index (down 15.9%), and Russell Microcap Growth Index (down 16.9%). That's a year of losses concentrated into a mere three weeks.

In this trading environment,  Real Money's Jonathan Heller is on the lookout for some honest to goodness bargains. Hard-hit Peloton came up for review, but it's looking iffy. 

“I'm surprised (but should not be) to see what has happened to Peloton Interactive  (PTON) - Get Peloton Interactive, Inc. Class A Report, which is down 83% over the past year and 24% year to date,” Heller said in Real Money. “This was a $166 stock last January but closed last Friday at just over $27.”

According to Heller, there couldn’t have been a bigger buzz about Peloton, with seemingly everyone and their brother buying one of its bikes during the pandemic and signing up for its subscription service to boot.

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“The most visible issue is that growth has slowed and the company reportedly has halted production due to soft demand,” he noted. “The bigger, perhaps less discussed issue is that Peloton is not profitable and is not expected to be at least through fiscal 2024 (June).”

What’s more, Peloton's balance sheet is not good enough to overlook the falling demand and profit picture.

“Peloton ended its latest quarter with $924 million, or about $3 per share, in cash and short-term investments and $838 million in debt,” Heller said. “The company is expected to lose about $300 million next year based on consensus earnings estimates.”

While Stifel recently upgraded Peloton shares from "hold" to "buy" with a $40 price target, and Needham now has a $50 price target, Heller isn’t sold on the stock.

“There's just not a big enough margin of safety for me at this point,” he said. “A better balance sheet and prospects for nearer-term profitability might capture my interest.”

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