Please ensure Javascript is enabled for purposes of website accessibility

Peloton Accelerates Expansion Plans With Price Cut

By Parkev Tatevosian, CFA – Sep 3, 2021 at 9:30AM

Key Points

  • Peloton is increasing marketing spend to get the word out.
  • The 20% price cut could spur customer demand for the expensive product.
  • It could also harm profit margins.

Motley Fool Issues Rare “All In” Buy Alert

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

The company lowered the price of its popular bike by $400.

Exercise equipment maker Peloton Interactive (PTON 8.48%) is picking up speed in its growth ambitions. The company experienced surging demand when folks were cooped up at home during the pandemic. As economies reopen, the company is still growing sales, but not at the frenzied pace it did during lockdowns.

Now management wants to make its products and services available to even more people. By cutting the price of its original bike, management is hoping to attract a wider market. It's a time-tested economic formula: When the price of a product decreases, more units usually get sold. 

Three people on exercise bikes.

Image source: Getty Images.

Laying the foundation for growth 

In its fourth-quarter earnings release, Peloton announced it would reduce its original bike price by $400 to $1,495. The product is still not cheap, but that's a major price cut. The bike was already one of its most popular products, and the 20% reduction in price is likely to see it adopted by more households. For the decision to be revenue-neutral, the company will have to sell about 27% more bikes at the new, lower price. 

Peloton is certainly preparing to sell more units by increasing its manufacturing capacity. It recently acquired Precor, an exercise equipment manufacturing company with facilities in the U.S., for $420 million.

And on May 24, Peloton announced plans to build its own U.S. factory. The facility will help its growth ambitions by adding capacity, lowering costs through automation, and accelerating its ability to take an idea to a product that is available for sale. The company expects bikes and other items to start rolling off the factory floor in 2023. 

With additional capacity and a lower price on a popular product, management wants to get the word out to consumers. Indeed, the company boosted spending on sales and marketing by 172% to $229 million in the most recent quarter. This is in comparison to last year when the company substantially reduced advertising because it didn't have the supply to meet surging demand. Still, nearly tripling spending in the category is a big increase.

What this could mean for investors

The market did not react kindly to the way Peloton's increased spending affected its profit margins. The company generated a net loss of $313 million for the latest quarter ended June 30 after earning a net profit of $89 million the year before. Not all of the difference is attributable to the price cut and higher marketing costs. Some of the loss is due to a product issue. After several accidents on its Tread machines, Peloton issued a recall, and the costs associated with that decision were higher than expected.

That could be another reason investors were not pleased with management's decisions to accelerate growth. Peloton may be expanding too quickly, perhaps rushing products to market without enough quality control. Especially after a safety issue with a product, investors may have preferred Peloton to slow down and make sure it gets things right. 

The stock is down 34% for the year and is trading at a forward price-to-sales ratio of 5.7, less than half of the nearly 12 it was trading at earlier in the year. What's more, Peloton is making an expansion push in the middle of an economic reopening. The combination of those two factors -- and the ensuing volatility in sales and profits that could follow -- may present investors with opportunities to buy this stock at a bargain. Be sure to put Peloton on your watch list.

Parkev Tatevosian owns shares of Peloton Interactive. The Motley Fool owns shares of and recommends Peloton Interactive. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Peloton Interactive Stock Quote
Peloton Interactive
PTON
$11.38 (8.48%) $0.89

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
349%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

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