Peloton is still struggling. But an analyst who predicted its difficulties early on says its problems are priced in.

By Bill Peters

'We believe shares reflect these concerns and risk/reward has shifted, even skewed upward at current levels,' BMO analysts say

Shares of connected fitness-bike maker Peloton Interactive Inc. got hit last week following the company's quarterly results, marked by a continued drop in sales and the disclosure of a $75 million settlement with Dish Network. But long-skeptical analysts at BMO think Peloton's (PTON) ailing stock finally reflects the difficulties of the company, which is trying to retrench following a pandemic-era boom and bust.

Analysts there upgraded the stock to the equivalent of hold from sell -- a rating they'd had since April 2020, when more people were exercising at home. The analysts kept their price target of $9.50.

The BMO analysts, led by Simeon Siegel, said Peloton's total addressable market, or TAM, might still not be as big as the company believes it is. But they said the stock has more room to run higher, after falling 41.9% over the past 12 months.

"Our Underperform rating the past few years was predicated on a mismatch between narratives and numbers; storytelling lifted shares as TAM tales painted a future more exciting than customer counts ever supported. We still fear TAM will prove materially lower than management expectations and see risks (hence not Outperform), but also see greenshoots."

"With PTON's first negative subscriber guidance behind us, we believe shares reflect these concerns and risk/reward has shifted, even skewed upward at current levels," the analysts continued.

Shares of Peloton rose 4.9% on Monday.

Peloton Chief Executive Barry McCarthy, in the company's earnings release last week, said the company expected a decline in subscriber growth in the fiscal fourth quarter, calling it "among our most challenging from a growth perspective." Fiscal third-quarter sales fell 22% to $748.9 million.

But the BMO analysts noted that the drop in Peloton's fiscal third-quarter sales wasn't as bad as Wall Street expected. And they noted potential seasonal factors behind the expected drop in subscribers for Peloton's fourth quarter, and said break-even results for the money-losing company were still possible.

The settlement with Dish (DISH), which involved alleged patent infringement related to video-streaming technology, would "significantly pressure" Peloton's free cash flow during the fourth quarter, McCarthy said. But he said the agreement "eliminates a cloud of uncertainty and an enormous distraction to the day-to-day operation of our business."

He said the company planned to do a brand relaunch for Peloton and re-introduce the Peloton app with tiered membership plans to draw new customers.

Peloton initially rode the pandemic -- and the resulting trend of at-home workouts after restrictions kept people out of gyms -- to massive gains. The company took steps to expand its factory and production footprint in an effort to handle the quarantine fitness boom. But Siegel, when downgrading the stock in 2020, worried that "accelerating member growth will prove a pull-forward of demand, rather than an expansion of it."

The money spent on expansion eventually did overshoot demand, which began to evaporate as the economy reopened, forcing Peloton to slash costs, staff and pull back on production. Shares plummeted through 2021 and last year. McCarthy stepped in as the company's new chief executive last year.

-Bill Peters

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05-09-23 0721ET

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