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Motley Fool Issues Rare “All In” Buy Alert

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Shares of Peloton Interactive (PTON 3.07% ) fell 13.6% this holiday-shortened week, according to data from S&P Global Market Intelligence, and there doesn't appear to be a bottom in sight.

An economy quickly taking a turn for the worse doesn't bode well for a manufacturer of luxury-priced connected fitness equipment. When inflation is running at 40-year highs, a gallon of gas is at the highest prices ever seen, and the prospects for a recession look all too real, spending $1,200 on a stationary bike or $2,300 on a treadmill is a non-starter for many.

It's been well documented just how badly Peloton misjudged the reopened economy. Instead of thinking the meteoric sales growth during the pandemic was just a one-off event, the equipment maker thought it was the new normal, invested in excess capacity, and sought to enter new verticals, like fitness equipment for hotels and spas. Bad choice.

After originally denying reality, Peloton issued a mea culpa saying it got it all wrong and would recalibrate its business. It brought on a new CEO to steer the business in this new direction, but it may be too little, too late.

Sales are in free fall, losses are widening, and its connected fitness classes -- the one thing that has continued to grow -- may stall, now that it's raised prices for them by $5 to $44 beginning this month.

CEO Barry McCarthy is looking to reduce costs by $800 million by fiscal 2024 through a new cost-savings plan he's implementing, and he just raised $750 million in a debt sale, which boosted the amount of cash the fitness company has in the bank to give it some financial flexibility.

Yet investors need to keep an eye on how fast Peloton will burn through that cash if it can't get sales growing. It's counting on a new leasing program to attract more buyers for its equipment. Rather than customers laying out all the money up front, it will rely upon a smartphone-like strategy of having customers pay off their equipment over time, allowing them to use their bike or treadmill while making small monthly payments. A subscription to the connected classes will be separate.

The problem is, Peloton is allowing customers to end their lease at any time, no questions asked and without penalty. If you decide you no longer want the equipment, Peloton will take it back, no charge. That increases the likelihood of inventory piling up, something it just had to write down and sell at a discount to get rid of.

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