Peloton shares crashed 24% yesterday. Is now the time to buy?

Jon Smith takes a look at the circulating media reports around Peloton that caused the share price to fall yesterday, as he tries to find long-term value.

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Over a one-year period, the Peloton Interactive (NASDAQ:PTON) share price has really struggled. It’s down 85%, and closed yesterday at just $24. The last time is was this low was back in March 2020. Compounding the downward pressure was fresh news yesterday that saw Peloton shares fall 24% on the day. So at what point does the stock become a buy for me, or is it something to permanently stay away from?

Speculation hurting Peloton shares

I have to be careful noting the news from yesterday because technically nothing has been confirmed by the company. Media reports have claimed that the business is going to suspend production of the Peloton bike for at least a month “according to internal documents obtained”. This follows up on other reports circulating that the firm is planning on some store closures and layoffs.

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Although I’ll have to wait to see whether/how much of these rumours are true, investors clearly haven’t decided to wait around. Some clearly think that the reports are true, hence the reason why Peloton shares have fallen.

Halting production or closing stores highlights that demand isn’t strong for core products. This could lead to lower sales, lower profit and a lower company valuation. 

In the short term, if the business comes out and refutes the claims, then Peloton shares could swiftly move higher. Yet I could see some truth in these reports. Back in November, I wrote about the company following poor results that were released. In the outlook for 2022, the business commented that “we anticipated fiscal 2022 would be a very challenging year to forecast, given unusual year-ago comparisons, demand uncertainty amidst reopening economies, and widely-reported supply chain constraints and commodity cost pressures”.

Therefore, in some ways the management team was preparing the market for the potential of underperformance. 

Potential long-term value

The question for me now is whether the company has long-term value. I find it interesting that at $24, the share price is back to where it was just as the pandemic hit. People staying at home turned into a huge bonus for the company, which grew substantially during 2020. So I don’t see any pandemic premium now built in to the share price. This makes the shares more attractive to me, as the share price hasn’t been bid up by speculative investors as much.

However, one of the primary reasons why the company has done so well is the pandemic and the restrictions that came with it. In my personal view, Covid-19 will be something that we will have around forever. But at the same time, I don’t see the world going back into a lockdown in the same way as 2020 or early 2021. So I think Peloton shares may not see their price above $100 for the foreseeable future.

I do think that the company will have to cut costs, trim down and rethink the strategy going forward. Yet fundamentally it’s in a good position in the sector and has a good product. Bringing this all together, I do think that in years to come, Peloton shares will be higher than $24, but won’t reach the heights seen last year. As a result, I’m considering a small investment in the company at the moment.

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Jon Smith has no position in any share mentioned. The Motley Fool UK has recommended Peloton Interactive. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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