Peloton (NASDAQ: PTON) is selling just under 24 million worth of Class A common stock to raise $1 billion that it can reinvest in its growth. Class A shares differ, in that, the shares usually carry more voting rights, giving the buyer a more active role within the company and its decisions. Also notable, is the option for underwriters to purchase an additional 3.2 million shares at the initial IPO price, less underwriting discounts and commissions, which roughly equates to $150 million.
Should investors be concerned?
Well, it hasn’t been a great turn of events for Peloton. The capital raise undervalues shares where they are currently trading, giving more than a 10% discount to the buyer.
Generally, companies opt to sell a portion of their shares when they are in a more favorable position or when shares are appreciating quickly i.e. when Peloton was trading at over $100 per share, it would have got better bang for its buck rather than making the offering now, when its shares have suffered a steep decline, down more than 60% from its highs.
This latest deal comes just weeks after Peloton announced it didn’t need to raise more money and the company has actioned a temporary hiring freeze, so we’ll have to see if the raise reinforces positive change in the coming quarters or whether it burns through a fresh cash pile in no time.
So why now?
Well, Peloton hasn’t had the best run in recent months. After a euphoric 2020, its growth has slowed significantly with the reopening of economies; whether that means users are exercising outdoors or returning to the gym, there’s a tonne of more options available now.
It’s noticeable too, with Peloton’s number of average monthly workouts per user falling drastically from two quarters ago — it was 26.0 in Peloton’s Q3 2021, 19.9 in Q4 2021, and in its most recent quarter, Q1 2022, it fell to 16.6, the lowest it has been in the last seven quarters.
It looks like Peloton is experiencing a similar faith, albeit, a bit later, to Zoom Video Communications (NASDAQ: ZM) which reached heights of $559 per share as a result on pandemic-induced necessity, to where it is now, at just under $265 per share.
You can learn all about Peloton’s current difficulties in our most recent episode of the Stock Club podcast.
Is Peloton a good investment now?
It’s not all bad. Peloton is still a leader in connected home fitness, and arguably, it has the greatest brand strength in the space. Another silver lining here is that subscription-based services, Peloton’s highest margin segment, is still growing substantially, up 87% to 2.49 million members from the year prior — that’s roughly 40% of its total 6.2 million users.
While the pandemic and stay-at-home trend benefited the business in a massive way, it can be extremely difficult to scale a business to match a pace of that nature, and in hindsight, the growth wasn’t sustainable. Despite the slowing growth in hardware sales and the supply chain issues though, fresh capital should help bolster the business and get it back on track so it can take a more incremental approach to its growth in the future.
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Financial Writer at MyWallSt
David's favorite stock is Google. He's a daily user of its YouTube platform, where you can learn or find something brand new at the touch of a button. He believes the company will continue to grow for many years to come.