Although it has bounced off its low of $20.20 since March 14, shares of connected fitness company Peloton (NASDAQ:PTON) should be avoided by investors. Since hitting a bottom, PTON stock has risen 39% to change hands at $28. While that might seem impressive, the price is almost 70% lower than it was six months ago and is 83% below its all-time high of $162.72.
The current rally has been due to gains in the broader market, as a rising tide does indeed lift all boats. However, the recent gains don’t hide the fact the exercise bike and treadmill manufacturer is struggling with some fundamental challenges to its business model. These problems are likely to negatively impact its finances and PTON stock going forward.
Righting the Ship in PTON Stock
Peloton was a darling of the stay-at-home stocks that were extremely popular during the onset of the Covid-19 pandemic. From April 1, 2020 through the end of the year, PTON stock gained 464%.
Today, all those gains are gone. The current rise in the share price has brought PTON stock back to $28 a share, the same level it was at just before the pandemic arrived in North America.
Over the past year, the company has been hit with a tsunami of difficulties, ranging from product recalls to supply chain constraints. Peloton also saw executive management changes and a growing amount of red ink on its financial statements. The company reported a net loss of $439 million last quarter.
Earlier this year, Peloton announced company founder John Foley would step down as chief executive officer (CEO) and be replaced by Barry McCarthy, a former chief financial officer at both Spotify (NYSE:SPOT) and Netflix (NASDAQ:NFLX). McCarthy, age 68, has been tasked with righting the ship and preventing it from sinking entirely.
He has wasted no time in trying to stop the bleeding at Peloton, cutting 20% of the workforce as part of a broad plan to achieve $800 million in annual cost savings. For the long-term, McCarthy will have to fix Peloton’s supply issues, ensuring the company can deliver treadmills and exercise bikes. He will also need to revamp the company’s flagging subscription model — something he managed to achieve at both Netflix and Spotify.
Peloton’s New Pricing Strategy
To bolster flagging subscriptions to its online exercise classes, which are broadcast on screens connected to its treadmills and exercise bikes, Peloton has introduced a new pricing strategy. Consumers now pay a single fee of $100 per month to get a Peloton Bike and access to the online workout classes.
The company is testing the new pricing model in Texas, Florida, Minnesota and Colorado. Previously, customers had to pay $1,495 for a Peloton Bike and $39 for a monthly subscription to the exercise classes. Many people financed the equipment purchase, taking on debt in the process.
McCarthy and his team are hoping the new pricing scheme will eliminate the need for financing and thus remove a barrier to owning and using a Peloton product. Will it work? It’s too early to tell. But McCarthy is clearly focusing on boosting revenue by concentrating on workout subscriptions rather than sales of bikes and treadmills.
As the company tests its new pricing, it has to fend off persistent rumors that Peloton is a takeover target. Rumored suitors have included Amazon (NASDAQ:AMZN) and Nike (NYSE:NKE), among other names.
Avoid PTON Stock
There’s a lot of uncertainty swirling around PTON stock. Can Barry McCarthy turn the struggling company around? Or will Peloton be gobbled up by a larger company?
Its future is unknown. What is known is Peloton remains a troubled company that is in full turnaround mode, and its immediate prospects look dim. Investors should not be fooled by the recent bump in the share price.
With any further missteps or disappointing earnings, Peloton stock can be expected to fall further. As such, investors should steer clear. PTON stock is not a buy.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.