What happened

Shares of home gym-equipment company Nautilus (NYSE:NLS) fell as much as 27.5% on Feb. 23 before regaining some lost ground. Still, by roughly 2 p.m. EST, the stock remained lower by a huge 20%. The company's earnings, released after the market closed on Feb. 22, were the reason, but that needs some explanation.  

So what

The bottom line for Nautilus was pretty good. The fitness-equipment maker earned $0.89 per share in the fourth quarter of 2020 compared to just $0.12 in the same quarter of 2019. That's an impressive increase, helped along by the fact that the coronavirus pandemic forced people to avoid public spaces, like gyms. This, in turn, led to an increase in sales of home gym equipment as people didn't want to give up their exercising habits. Wall Street had been projecting earnings of $0.75 per share, so Nautilus beat analyst consensus as well. Normally, you would expect a stock to rise on such news. But that clearly didn't happen. 

A man with his head on table and a graph behind him heading down.

Image source: Getty Images.

The problem was on the top line. Nautilus's Q4 sales came in at $189.3 million, up more than 80% from the year prior. However, analysts were hoping to see revenues of about $192 million. While that's not such a huge miss, you also have to look at the stock price to understand why it spooked investors. Over the past year, Nautilus's shares have been higher by around 500%, a number that includes today's losses. Just a few days ago, they were higher by more than 750%. The stock looks like it was priced for perfection, and Q4 was mixed, with a strong earnings beat but a revenue miss. That wasn't good enough for Wall Street, and investors dumped the stock.  

Now what

Nautilus is a story stock, benefiting from the economic shutdowns and social distancing that came along with the coronavirus pandemic. It is likely that this is a unique windfall event and that, at some point in the not-too-distant future, the boost to sales and earnings will fade away as the world learns to deal with COVID-19. In fact, the sales trend here is already starting to hint that the peak is past, with Q3 revenues up 150% year over year, Q4 up about 80%, and the company projecting the next quarter could see year-over-year sales growth fall as low as 55%. That figure excludes the impact of the October sale of the Octane division, which will likely mean that adjusted growth comes in higher than 55%, but the company-provided numbers clearly didn't inspire confidence among investors

Meanwhile, investors have priced in a lot of good news here, something that remains true even after today's large price drop. As today shows, it didn't take much to get some shareholders questioning their commitment to Nautilus's stock -- perhaps for good reason. Long-term investors should probably tread with caution.  

Editor's note: This article has been updated to note that the company estimate for next quarter excludes the impact of the October sale of the Octane division.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.