Peloton (PTON 13.60%) has taken investors on a wild ride since its IPO in September of 2019. The stock was priced at $29, but initially slumped below its offering price as investors questioned the appeal of Peloton's expensive exercise bikes and streaming spin class subscriptions.
Interest in Peloton remained tepid until about a year ago, when gyms and other businesses started closing down to deal with the pandemic. That sudden shift caused Peloton's sales to surge, and the stock rallied throughout 2020 and hit an all-time high of $171 per share this January.
However, the stock then lost more than half its value and now trades in the low $80s. Let's see why the bulls abandoned Peloton, and why it makes sense to sell this volatile stock before things get worse.
The post-pandemic slowdown
Peloton's revenue doubled to $1.83 billion in fiscal 2020, which ended last June, and surged 153% year over year to $3.09 billion in the first nine months of fiscal 2021. It expects its revenue to rise 119% to $4 billion for the full year.
Its number of connected fitness subscriptions jumped 135% year over year to over 2.08 million in the third quarter. Its number of connected fitness workouts increased 239% to over 149.5 million, while its average number of monthly workouts per connected fitness subscriber rose from 17.7 to 26.0.
Peloton also generated a net profit of $124 million during the first nine months of 2021, compared to a net loss of $161 million a year earlier. Its adjusted EBITDA of $299 million also marked a significant improvement from its loss of $26 million a year earlier.
These numbers are all impressive, but Wall Street only expects Peloton's revenue to rise about 36% next year as the pandemic passes and more gyms reopen. We should take those forecasts with a grain of salt, but investors should also brace for a post-pandemic slowdown.
The treadmill debacle
At the end of the second quarter, Peloton told investors its full-year revenue would rise at least 123%. It lowered that forecast to 119% in the third quarter due to the recent recall of its new Tread and Tread+ treadmills, which could reduce its fourth-quarter revenue by $165 million.
Peloton had originally expected its treadmills to diversify its business away from its bikes and widen its moat against potential competitors, but a series of accidents involving children caused the U.S. Consumer Product Safety Commission to issue a public warning and urge Peloton to issue a recall.
That situation was bad, but Peloton made things worse by saying the agency's claims were "inaccurate and misleading" and refusing to recall the treadmills right away. Peloton eventually agreed to recall the treadmills, but the debacle likely tarnished the premium brand appeal it had been cultivating.
I previously compared Peloton to GoPro (GPRO 1.94%) and Fitbit, which both initially generated impressive growth before they saturated their respective markets. GoPro and Fitbit both struggled with recalls as they expanded their product lines, but neither company publicly defied regulators.
Here come the competitors
Peloton enjoyed an early mover's advantage in its niche market of connected bikes and subscription-based workout classes, but many formidable rivals are now targeting the same market.
Apple (AAPL 2.14%) launched its Fitness+ streaming workout service, which lets users access a wide variety of workouts across all its devices, last December. lululemon athletica (LULU 1.49%) acquired Mirror, a producer of "smart mirrors" for remote workouts, last summer. Peloton also faces new connected bike makers like Echelon.
Competition wouldn't be a major issue if the remote workout market was still rapidly expanding. However, the competition is heating up as the pandemic passes and more gyms reopen -- which means Peloton needs to fend off these rivals in a shrinking arena.
The valuations still matter
Rising bond yields and a focus on reopening plays have caused many investors to rotate from growth to value stocks over the past few months.
That shift could be bad news for Peloton, which still trades at nearly 120 times forward earnings. The bulls will claim that Peloton deserves that premium, since analysts still expect its earnings to grow 129% next year.
Yet those forecasts likely haven't factored in the full impact of its treadmill recall yet. Peloton could also struggle to beat those expectations if its competitors gain more momentum.
The bottom line
Peloton isn't doomed yet, but there are plenty of better growth stocks to buy right now. Investors should consider taking profits in this shaky stock and stick to companies with brighter futures.