Shares of connected fitness company Peloton Interactive (PTON 0.80%) were slammed on Friday. The growth stock fell about 9% as investors worried about the company's wider-than-anticipated fiscal fourth-quarter loss and a significant price cut for the original Peloton Bike.
Is the stock's weakness a sign of worse to come over the long haul, or is this a buying opportunity?
Understanding Peloton's price cut
Peloton's decision to reduce the price of its bike could be viewed as either a positive or a negative move. On one hand, investors may worry that it's a sign of weak demand and diminishing pricing power as competition intensifies. On the other hand, however, it could be an aggressive move from a market leader to take market share while Peloton is still early in its growth story.
Based on management's comments during Peloton's earnings call, the latter -- and not the former -- is the case.
Asked whether the price decrease for the Peloton Bike was defensive or aggressive, Peloton CEO John Foley said it was "absolutely offensive..." It was a part of a move to make the company even more competitive in its efforts in "democratizing the access to great fitness."
Adding new digital subscribers, Foley said, is the company's "True North," after all. With an improved supply chain that can handle higher volumes, Peloton says it wanted to make its bike more accessible to a wider audience, leading to more subscriber additions. Peloton's growth strategy, Foley reminded investors, is about the lifetime value of users -- not the upfront value from the sale of its connected fitness hardware.
And the lifetime value goes beyond ongoing subscription fees, Foley explained. The company also thinks "about selling those same people -- the same households -- future Treads, and future products, apparel and all the other stuff that becomes a much broader [lifetime value] picture over time."
Supporting Foley's bullish view for the company even as it's cutting the price to an important product, management noted that it is seeing strong demand for its products. Consider that the company expects higher unit sales of its bikes in fiscal 2022 than fiscal 2021 (which ended on Jun. 30, 2021).
This is more of a bullish signal than it might seem at first glance because fiscal 2021 benefited from extraordinary demand; the company's connect fitness products revenue skyrocketed 115% as consumers bought up the company's inventory in droves during a pandemic that had people spending more time at home.
Meanwhile, demand looks promising for the company's more nascent treadmill business, which just suffered a voluntary recall. Peloton president William Lynch said in the company's earnings call that it has seen "incredibly strong leads" for its treadmill business.
Is Peloton stock a buy?
Despite management's optimism, deciding whether the price cut is smart or not is a tough debate. Time is required to see how well the company's more aggressive pricing strategy will translate to lifetime value from customers. But given how robust demand is for the company's products and how well the company has executed on its connected subscription strategy so far, I'm going to side with management's optimism as it relates to this price cut.
While there's always risk to buying shares of any stock, this may be one of those times where buying the dip could pay off nicely over the long haul. Of course, investors should reassess this thesis in the coming quarters as Peloton's more aggressive pricing strategy plays out.