VSconnected exercise equipment company Interactive Platoon (NASDAQ: PTON) saw its shares climb about 13% in the hours following the announcement of a $ 1 billion secondary stock offering on Tuesday morning. The company’s stock price has been beaten for weeks following disappointing first quarter financial results, as well as an alarming drop in management guidance. Therefore, the massive rally in the stock may seem confusing at first glance. After all, the company just announced that it would dilute its shareholders while signaling its need for more cash than its sales provide. However, there is indeed a bullish underlying current that the stock market has correctly identified.
There are still a lot of warning signs around Peloton
Regardless of the stock market’s enthusiasm for offering Peloton stock, risks remain high for the online training provider, and it will still need to take aggressive action to secure a turnaround. In its first quarter of fiscal 2022, which ended September 30, revenue growth was positive, driven by an increase in its overall subscriptions. However, the use of its application has declined significantly, and in its updated forecast it has reduced all of its most significant previous estimates for fiscal 2022. It also continued to generate net losses, and management anticipates even greater loss of income to come.
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The so-called ‘grand reopening’, when the period of COVID-19 closure and forced business closures largely ended, shifted Peloton from its upward trajectory due to the pandemic to a declining one . Large gym operators have reported that customers are returning to physical gyms in numbers approaching those seen in 2019 before the coronavirus arrived in the United States
In another recent development, Peloton launched high-profile lawsuits against two of its competitors on Monday. First, it is suing the maker of NordicTrack iFIT for patent infringement, in part based on U.S. Patent No. 11,170,886, which was just granted on November 12. with other Peloton users in live and on-demand exercise classes. “
The lawsuit alleges that iFit “attempted to circumvent Peloton’s innovative technology” by using its own ranking technology, involving home streaming and live online workouts, which it uses in at least 55 products. Peloton is also suing Echelon for using an “imitator rating” for its bikes, treadmills and rowers. Some commentators say it is also a sign of desperation on Peloton’s part, although it is also true that the company has long been very contentious, even in 2020 when it was on the rise.
Why is selling stocks so popular with investors?
Peloton’s miscellaneous troubles caused its stock value to drop from about $ 114 per share in early September to about $ 86 in early November, just ahead of its fiscal first quarter earnings report. That report sparked another drop, with stock prices hitting a low of around $ 47 on Monday.
However, the announcement on Tuesday of the expected sale of around 23.91 million shares gave the action a boost. They will sell for $ 46 a share and the offering is expected to bring in around $ 1.07 billion to be used for “general business purposes.” The offering includes 3.21 million additional optional shares that the underwriters can purchase and is expected to close on Thursday. Wall Street responded by bidding on 13% Peloton shares at noon Tuesday. They closed that trading day up 15.5%, although a slight downward movement occurred after hours.
Since the secondary offering is equivalent to approximately 8% of Peloton’s total market capitalization at the time of the announcement, the sale will significantly dilute current shareholders. There are several reasons why Wall Street’s positive response to the news was not wrong, however.
One possible factor has been described by Baird analyst Jonathan Komp, who now predicts that the stock should not fall below a low of $ 50 per share. He expects improvements over the next few quarters. In addition, he believes the stock offering will restore investor interest by freeing Peloton “from a large short-term surplus,” according to his research note, which also described the practice firm as a “new choice”.
An even bigger factor in the optimistic response, however, could be the vote of confidence from major investors that this stock offering represents. According to Peloton’s press release, those who will purchase the newly issued shares include “entities affiliated with Durable Capital Partners LP and TCV, […] and funds and accounts advised by T. Rowe Price Associates, Inc. “In short, large institutional investment firms and their clients believe that a large investment in Peloton is worth it and are investing money in it. conviction.
Large companies with reputations to protect – along with in-depth analysis and high-quality information gathering – have enough confidence in Peloton’s future to buy over $ 1 billion in new stock. This is a remarkably powerful endorsement, and probably helps explain the bullish sentiment on Wall Street.
While the company is still clearly grappling with the headwinds generated by the resurgence of physical gyms and a possible decline in interest in connected home exercise platforms, following this sale of shares, Peloton appears to be at least neutral again and worth watching. It could even be a buy – albeit a risky one – among gym stocks.
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Rhian Hunt has no position in the stocks mentioned. The Motley Fool owns shares and recommends Peloton Interactive. The Motley Fool has a disclosure policy.
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