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Should Peloton Investors Be Worried Right Now?

By Matthew Frankel, CFP® and Toby Bordelon – Oct 15, 2021 at 7:42AM

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There are some headwinds facing the business, but will they be temporary or permanent?

There are certainly some reasons for Peloton (PTON -4.12%) investors to worry about revenue growth, such as the company's decision to cut the price of its signature exercise bike, and the reopening of gyms and other exercise facilities across the U.S. In this Fool Live video clip, recorded on Sept. 29, contributor Toby Bordelon discusses whether these headwinds could be temporary or if they're more of a longer-term concern.

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Toby Bordelon: The quarter itself was good, but there were some warning signs. Revenue growth is slowing with 54% year-over-year which seems good, by compared to the previous four quarters of triple-digit growth not as good. More concerning Peloton set for this next quarter, revenue is going to grow 6%, which not awesome, and gross margins are expected to decline.

The bigger news though is they cut their price of their lower tier by $400, that's about a 20% price cut. The concern there is the demand falling off. It might be, but it's better to sell a lower-priced bikes with that $40 a month subscription to the sell of no bike and no subscription at all. You see where they're going with this. Functionally, they sell two products, if you really want to boil it down. They sell expenses exercise equipment for your home and they sell a virtual gym membership.

I'm wondering if what we're seeing here, is there a reversion to reality? I like that phrase, reversion to reality. Most businesses are what they are. They can be better, but there is some level of you sell what you sell and you got to make the most of that. The good news, they're selling to try out again, which is great because competition in this space is rough. You've got iFit coming public, formerly known as Icon. You got Nautilus (NLS 0.50%) stepping up their game with an acquisition. Echelon (ELON) is still out there with Mario Lopez. Gyms are actually reopening.

Peloton needs more devices. It's great to see them get the tread out, but I think they need more. They say they have new products in production. Their focus now, according to management, for this coming year is owning strength. That's like their own cardio with a bike. What does that mean? Something to compete with Tonal or Tempo maybe. Are they bringing us out a strength device?

I don't know. But we do have rumors. Brian, I love the Internet. God bless the Internet. Do you remember back in the '90s, the site called Ain't It Cool News, which had like rumors of movies, rumors about movies of Hollywood stuff, way back in the day? Well, now you have that for anything you want, including companies like Peloton. Shout out to Pelo Buddy,, a Peloton rumor site, news site, which brings us the rumor I have for you today.

There are rumors of a rower. We've heard this in the past, but let me show you this comments from Pelo Buddy. This is supposedly a schematic from the factory they're building in Ohio, one of the new factories. On the lower right there, you're going to see some boxes that say rower tester. Theoretically, this new factory is going to have a space such as rowers that suggests they're building a rower. Some reports have production starting in 2022, next year.

Apparently, the Android app of Peloton contains a hidden reference to a rower, so it might be on the verge of getting us a new device. There are also rumors of a specific strength machine, but that's less clear and there's less evidence there. My guess, if I had to make one, is that owning strength means this rower for upper body and maybe the tread for your legs is what they're talking about with that in the coming year. Maybe we'll get announcement this year or early next year, we'll see. But a new device I think would help spike demand for their services.

Toby Bordelon is short shares of Peloton Interactive and has the following options: short October 2021 $100 puts on Peloton Interactive. The Motley Fool owns shares of and recommends Peloton Interactive. The Motley Fool has a disclosure policy.

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