Please ensure Javascript is enabled for purposes of website accessibility

1 Warning Sign in Peloton's Earnings

By Neil Patel – Sep 1, 2021 at 7:03AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shareholders have to weigh the pros and cons of management's latest strategic move.

Unsurprisingly, Peloton Interactive (PTON -4.90%) was one of the biggest winners during the most restrictive phases of pandemic. The maker of highly sought-after and innovative fitness equipment was growing rapidly before 2020, but last year's stay-at-home orders boosted the company's prospects. 

Peloton reported its latest quarterly numbers last week to a disappointed investor reaction, as the stock shed almost 9% of its value following the news. This consumer discretionary business missed earnings expectations and provided soft revenue guidance for the current quarter. 

What caught my attention, though, was a strategic move by management that could have serious implications for Peloton's long-term outlook. 

A flashing red light with the word "warning" underneath it in red letters.

Image source: Getty Images.

Price of flagship product is lowered 

Management announced that the price of Peloton's crown jewel, the Bike, is being reduced by 21%. This marks the second price reduction for this product, which will now cost consumers $1,495. Because a significant portion of Peloton's revenue comes from the Bike, this decision will have a major impact on the business going forward. 

"Today, we announced our latest step on the journey to broaden the accessibility of our products. We are lowering the price of our original Bike by $400 to $1,495," founder and CEO John Foley announced on the fourth-quarter earnings call. While this definitely took Wall Street by surprise, it does jibe with Peloton's overarching goal to "help people be the best version of themselves by making it easier to access world-class fitness and wellness content." 

Certainly, a lower price point will help to achieve that mission of greater accessibility. For the current fiscal year, management is expecting higher Bike and Bike+ unit sales compared to fiscal 2021. That's saying a lot, given how strong demand was during the pandemic. 

How should investors interpret this? 

There are two ways that Peloton shareholders can decipher the Bike's price reduction, and it could impact whether or not you choose to stay as an investor. 

If you agree with Peloton's leadership team, then this is a positive development by the business. Lowering the price expands the potential market opportunity. "We think at a $1,495 entry point, it is absolutely worth the ability for us to grow our addressable market," CFO Jill Woodworth said on the earnings call. 

This move is important because in fiscal 2020, more than half of Peloton's U.S. Bike customers had an annual household income greater than $100,000. Attracting less affluent people will result in more subscription revenue. Remember, connected-fitness subscribers pay a $39 monthly fee to access workouts, and this generates a much higher margin than equipment sales. Therefore, decreasing the price can be viewed as a strategic customer acquisition tactic. 

Now the bad news 

The argument can also be made that this is a bearish signal. The pandemic put the spotlight on just how lucrative and in-demand at-home fitness equipment is, something that has resulted in rivals entering the market with their own compelling product offerings. Competitors like Hydrow, Tonal, and Lululemon Athletica's Mirror give workout junkies plenty of options to choose from. 

So, the price drop could be an admission by management that demand is falling as the home workout market heats up. Peloton is also expecting sales and marketing costs to rise substantially this fiscal year, further supporting this viewpoint. Getting the attention of consumers will be more difficult now that pandemic restrictions are easing and people are spending more time away from home. 

It's obviously too early to tell whether the Bike's price reduction is a good or bad move for Peloton. Shareholders need to pay close attention to how the business performs over the next few quarters. This will provide more color and will help investors determine if management is making the right decisions. 

Neil Patel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica and Peloton Interactive. The Motley Fool has a disclosure policy.

Stocks Mentioned

Peloton Interactive Stock Quote
Peloton Interactive
$11.85 (-4.90%) $0.61
Lululemon Athletica Stock Quote
Lululemon Athletica
$372.33 (0.63%) $2.33

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.