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Why Peloton Interactive Stock Dropped 17% in February

By John Ballard - Mar 6, 2020 at 12:46PM

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Despite a strong holiday quarter, investors didn't like the company's near-term guidance.

What happened

Shares of Peloton Interactive (PTON 4.76%) lost 17.5% last month, according to data provided by S&P Global Market Intelligence.

Peloton's latest earnings results in early February showed robust sales growth through the holidays, but forward guidance was below investor expectations, which caused the sell-off in the stock price.

A Peloton exercise bike sitting in a living room.

Image source: Peloton Interactive.

So what

There was no shortage of demand for the company's connected fitness products in December. Total revenue soared 77% year over year to $466 million. Peloton ended the quarter with 712,005 connected fitness subscribers, representing an increase of 96% year over year.

However, a timing issue with deliveries will cause revenue growth for the fiscal third quarter ending in March to decelerate to 50%, at the midpoint of the guidance range.

Now what

The market's reaction was too narrowly focused on the short term, because it's clear Peloton is enjoying strong momentum. Management raised full-year guidance. Revenue is now expected to grow by 68% for the year, with connected fitness subscribers up 81% at the midpoint of guidance.

Growth could be better than expected in the next quarter if more people decide to work out at home due to the COVID-19 coronavirus outbreak. Peloton stock was drifting higher in late February, even though most stocks were in free fall.

Engagement with Peloton's bikes and treadmills has looked fantastic lately. In the last quarter, average monthly workouts per subscriber improved to 12.6, up from 9.7 a year ago. The company also continues to experience a low churn rate of 93% on a 12-month basis, which shows that most customers are happy with the workout programs.

But churn might tick up in the near term as more people take advantage of Peloton's new 30-day home trial, which could increase the number of returns.

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