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Can Peloton Ride the Bike to New Heights?

By Neil Patel – Oct 18, 2021 at 9:19AM

Key Points

  • At a lower price of $1,495, the Peloton Bike can now attract a bigger pool of potential customers.
  • The at-home fitness manufacturer has been dealing with a host of problems recently, which makes the price drop look like a defensive move.
  • Shareholders should pay close attention to management's commentary about the Bike's sales in the next quarterly report.

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Upcoming results from the company's first fiscal quarter in early November will give shareholders the answer.

When Peloton Interactive (PTON -1.19%) reported its financial results a couple of months ago, the biggest development was that the company reduced the price of its original stationary bike by $400. "Today, we announced our latest step on the journey to broaden the accessibility of our products," CEO John Foley said. The Bike will now set you back only $1,495. 

For the $26-billion maker of connected-fitness equipment, this is a major initiative by management to drive higher levels of demand. And if it proves to be the right strategy, it can propel Peloton's business (and stock price) to new heights. 

person riding Peloton Bike in living room

Image source: Peloton Interactive.

A positive for consumers 

Lowering the price of the Bike, which is the product that put Peloton on the map, is clearly something potential customers are happy about. In fiscal 2020, 54% of people who bought a Bike came from households earning more than $100,000 in annual income. So this lower-cost strategy certainly opens up the market opportunity for Peloton to sell its pricey equipment to consumers who were previously on the fence about making a purchase. And it addresses one of the biggest knocks on the company regarding affordability. 

It's obvious that the success of this business is predicated on increasing the number of users by selling more equipment. Over the past several quarters, Peloton has rapidly grown its base of connected-fitness subscribers (those who purchased a piece of equipment) to now total 2.3 million. The company continues to monetize these customers by charging a $39 monthly fee for access to a massive workout library. This subscription revenue represented just 30% of overall sales in the last quarter. 

The plan is to get as many pieces of equipment as possible out into the world. Then, as a larger chunk of its business comes from high-margin subscriptions, over time net income growth should follow. This strategy of offering expensive hardware with differentiated software is not unlike what Apple does with its iPhones and various services. 

Still TBD from the company's perspective 

Although the total addressable market is bigger now, the price drop can also be viewed in a negative light by investors, who can understandably believe that the move is coming from a position of weakness. Over the past year, Peloton has been dealing with supply chain issues, Tread and Tread+ safety recalls, and an accounting problem related to its financial reporting process. Maybe management is in desperation mode and needs to drum up demand fast in order to keep the momentum going. 

Adding fuel to the fire is the ongoing reopening of brick-and-mortar gyms and an increasingly crowded at-home fitness market. For just $10 a month, Planet Fitness is a viable option for most people. And for those who want to shell out four-figure sums for innovative and tech-enabled equipment, Hydrow, Tonal, and Lululemon Athletica's Mirror will gladly take your money. 

Jill Woodworth, Peloton's CFO, gave an update on the Bike on the fourth-quarter earnings call: "Given our significant manufacturing capacity and logistics investments during the past year, we are entering fiscal 2022 with a normalized backlog for our Bike portfolio, and guidance reflects our expectation of continued strong demand." Reaching scale in manufacturing might be a good reason to drop the Bike's price, but the timing of the announcement doesn't paint Peloton in a good light. 

Is the stock a buy today? 

Peloton's stock has taken a huge hit since reporting fourth-quarter 2021 financial results on Aug. 26, falling 25% in less than two months. And year to date, the company has shed 44% of its value. What was once an absolute darling on Wall Street that saw its business surge thanks to the pandemic has now significantly fallen out of favor with investors. 

While Peloton expects to sell 1.3 million pieces of equipment this fiscal year, the leadership team doesn't break it out by different products. Investors will have to just wait and see when Peloton's next report comes out in early November. If the Bike's sales figures in the upcoming quarter show positive signs, then Peloton's shares could be worth buying. But if the company's flagship product fails to sell well even with a now-cheaper price tag, then this is a ride that investors probably do not want to take.  

Neil Patel owns shares of Apple. The Motley Fool owns shares of and recommends Apple, Lululemon Athletica, Peloton Interactive, and Planet Fitness. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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