A onetime market darling in 2020, Peloton Interactive (PTON -2.71%) stock is not getting much love lately. The company's shares are down about 40% this year as it faces several challenges, including a product recall, supply-chain constraints, and the effects of reopening economies.

Still, those are short-term issues likely to be resolved before the end of 2022. There could be a longer-run structural headwind that is keeping Peloton's stock grounded. Although the company earns subscription revenue, the majority of its sales come from long-lasting exercise machines, and here's why that could put investors on pause. 

Person on an exercise bike.

Image source: Getty Images.

Peloton's sales could suddenly decrease

In its most recent quarter, Peloton reported 2.3 million connected fitness subscribers. These members purchased a Peloton exercise machine and paid $39.99 per month to access Peloton's live and recorded exercise classes. Overall, subscription revenue totaled $281 million in the fourth quarter.

Compare that to Peloton's total revenue of $936 million in the quarter, and it shows the bulk of its sales come from products. That could be a challenge for the company because the products it sells can last for several years. That means once Peloton saturates its total addressable market -- estimated by management at 75 million households -- its sales could drop off significantly. Peloton would then have to rely on existing customers upgrading older machines every few years.

The good news is that the subscription side of the business will bring in recurring revenue at higher margins. Indeed, the gross profit margin of the subscription business was 63.3% in the latest quarter compared with 56.8% a year earlier. And there is the potential to increase prices on subscribers over time as the company adds content. There is also the potential to improve the gross margin on the subscription segment as Peloton adds more members. The cost of creating the content will be roughly the same, but it will be spread out over a larger audience. 

The bright side of Peloton's business prospects

While it may be true that Peloton's sales could decrease significantly once it completely penetrates its total addressable market, that could take several years or longer to occur. The subscription business could be many times larger by then and with higher profit margins than today. 

Meanwhile, management is focused on being the No. 1 player in the connected fitness market, making strategic moves like lowering the price of one of its original bikes by $400. Here's what CEO John Foley said on competition at an investor conference on Sep. 22: 

I believe, you could obviously fact check it, the Peloton with the $1,495 price point is now the lowest price indoor stationary bike with a 22-inch screen. So even vis-a-vis the low-cost copycats, we have now undercut them. So now you can get a Peloton bike, which is 5 to 10x better for less money. So we basically, I believe, have shut the door on the idea that there's going to be another bike competitor.

Peloton's stock price sell-off 

A chart showing Peloton price to sales ratio.

Data by YCharts.

Peloton stock's 40% drop in 2021 has it trading at a price-to-sales ratio of less than 7, or only about a third of what it was selling for earlier in the year. That could be an opportunity for long-term investors. Or you could place Peloton on your watch list and wait for it to make progress against its short-term challenges before starting a position. Either way, Peloton stock deserves investor attention.