Peloton Stock Drops on Earnings Miss, Weak Outlook, and Federal Subpoenas

Peloton Interactive (PTON 4.43%) reported results for its fiscal fourth quarter and full year 2021 (which ended June 30) after the market close on Thursday, Aug. 26 that likely disappointed many investors.

Shares of the connected-fitness company are down 8.8% on Friday as of 11:51 a.m. EDT. 

The market's negative reaction is probably largely attributable to fiscal Q4 earnings missing Wall Street's consensus estimate by a wide margin, management's sales and profitability guidance for the first quarter of fiscal 2022 coming in lower than analysts had expected, and its profitability outlook for full fiscal 2022 also falling short of the Street's expectation. The company's large cash burn in fiscal Q4 is probably also a factor.

Friday morning brought more news that's likely weighing on the stock. Peloton disclosed that it has been subpoenaed by the U.S. Justice Department and Department of Homeland Security for information relating to its reporting of injuries caused by its exercise machines.

Peloton was a top growth stock in 2020 but has struggled this year. Some investors have been concerned that the company's sales would suffer upon the broad reopening of economies, and its brand could be hurt by management's handling of the safety recall of its Tread+, its higher-end treadmill that was linked to the death of one young child and dozens of reported injuries. (Peloton paused the sales of and recalled both of its treadmill models in May. It just announced on Tuesday that it will begin selling its new version of the Tread in the U.S., Canada, and U.K. on Aug. 30, and in Germany in the fall.)

Image source: Peloton.

Peloton's key quarterly numbers 

Data source: Peloton Interactive. Fiscal Q4 2021 ended on June 30.

Revenue growth was driven by a 35% rise in product revenue to $655.3 million and a 132% increase in subscription revenue to $281.6 million. (Product revenue includes a full quarter's contribution from Precor, the commercial-occupancy fitness company Peloton acquired on April 1.) The number of connected-fitness subscribers grew 114% year over year to 2.33 million, and average net monthly churn was 0.73%. Churn increased from 0.52% in the year-ago period, though it is still relatively low.

Overall gross margin was 27.1%, product gross margin was 11.6%, and subscription gross margin was 63.3%. The company had guided for overall gross margin of 35% and product and subscription gross margins of 21% and 68%, respectively. The overall gross margin fell short of management's outlook due heavily to return rates for the recalled treadmills being higher than management had anticipated, CFO Jill Woodworth said on the earnings call.

Management had guided for revenue of $915 million, so the company beat this expectation. (Peloton doesn't provide earnings guidance.) Wall Street had been expecting a loss of $0.44 per share on revenue of $921.7 million, as outlined in my earnings preview. So the company's top line modestly exceeded the analyst expectation, but its bottom-line loss was more than double the consensus estimate.

Bike price lowered, and extended financing introduced for Bike+ and Tread

Peloton announced a couple of moves intended to increase sales of its exercise machines. Its primary goal with these moves is to boost sales of its streaming subscriptions, which are recurring and sport much higher gross margins than its equipment.

Peloton is lowering the price of its flagship Bike model by $400 to $1,495 across all of its markets. This is the company's second time slashing the price of the Bike, which originally had a price tag of $2,245 before it was lowered to $1,895 last September.

In addition, the company is lowering the cost of its 39-month, 0%-interest financing plan for Bike by $10 to $39. It's also introducing a longer, 43-month, 0%-interest financing option for Bike+ and Tread across all regions, which it says equates to a cost of about $59 per month.

Spending too much cash?

Peloton used $599 million in cash running its operations during the quarter. It ended the period with $1.6 billion in cash, cash equivalents, and investments in marketable securities -- that total is down from $2.69 billion last quarter.

The company is spending cash too freely, in my view. The $599 million figure above doesn't include capital expenditures, which are cash spent on growth initiatives. In one quarter, the company's cash, cash equivalents, and investments in marketable securities declined by about $1.1 billion. At this cash burn rate (or even at a somewhat slower one), its $1.6 billion won't last long.

Granted, Peloton can tap its $285 million revolving credit facility or sell more stock if it needs to raise funds. But it's probably safe to say that a fair chunk of investors will not be happy if the company is forced to do so. Issuing stock would dilute the ownership of current shareholders. 

Guidance wasn't endorphin-inducing

While Peloton's products have surely helped many exercisers to generate the feel-good chemicals called endorphins, its guidance probably didn't have the same effect on investors. For fiscal Q1 2022 (corresponds to calendar Q3 2021), management expects revenue of $800 million. This would represent growth of 5.6% year over year and a decline of about 15% sequentially. Going into the release, analysts had been modeling for fiscal Q1 revenue of $1.06 billion, so management's outlook fell quite short of the consensus estimate.

We can deduce that the fiscal Q1 profit metric guidance the company provides also came in lower than analysts had expected. Peloton doesn't provide earnings guidance, but it does issue an outlook for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). It expects this metric to be negative $285 million in fiscal Q1. Wall Street was modeling for the company to break even on the bottom line.

For the full 2022 fiscal year, management guided for revenue of $5.4 billion, which was roughly in line with the consensus estimate of $5.3 billion. This revenue result would represent growth of about 34% year over year.

We can also deduce the company's outlook for full-year adjusted EBITDA came in lower than analysts had been expecting. Management guided for fiscal 2022 adjusted EBITDA of negative $325 million, while the Street had been modeling for adjusted earnings per share of $0.50.

Keep the long term in mind 

In short, Peloton turned in a disappointing quarter. That said, long-term investors should not give too much weight to results for just one quarter -- or just one year, for that matter. 

I'll reiterate what I wrote last quarter: "At this point, I'm neutral on Peloton stock as a long-term investment. Currently, there are other stocks that also have strong upside potential but less downside risk."

A stock to buy now?

Given my above statement, it seems only fair to name a stock that I'm bullish on: Nvidia. You can read my take on the graphics chip specialist's most recent quarterly report here.