Interactive exercise equipment manufacturer and seller Peloton (PTON 2.62%) experienced a surge in customer demand for its products at the pandemic onset. Folks who saw gyms would be closing their doors to the public looked to home-exercise options. At one point, Peloton was so backed up with orders that customers had to wait ten weeks for delivery.
COVID-19 vaccination rates have accelerated worldwide, allowing governments to reduce business restrictions. Gyms are reopening, and that is causing sales of Peloton products to level off. To spur demand and fend off competition, Peloton lowered prices on its bikes by $400 just a few months ago. When the company reports fiscal 2022 first-quarter earnings on Nov. 4, investors will want to see increasing unit sales due to the decrease.
Peloton stock is down over 40% this year as economies are reopening. Image source: Getty Images.
Lower prices on bikes could deter competition
From 2017 to 2021, revenue for Peloton has nearly doubled every year, going from $219 million to $4 billion. In addition to selling exercise equipment, Peloton sells a monthly subscription that gives users access to live and recorded classes.
In its most recent quarter, revenue growth decelerated to 52% from the same quarter the year before. A combination of factors including reopening economies reduced enthusiasm for Peloton products. Management estimated that its revenue growth rate will decelerate further, forecasting revenue of $5.4 billion for fiscal 2022. If the company hits that target for the year, it would be 35% higher than the $4 billion from the year before.
Peloton is also expecting gross profit margin to fall by over 200 basis points year over year, to make matters worse. Decreasing the price of its bikes by 20% or $400 will lower gross profit margins, but the company hopes it will improve total gross profits by selling more units. Customers who buy a connected fitness product like the bike will subscribe to Peloton's interactive exercise classes at $39 per month per household.
Furthermore, by lowering its price on the bike, Peloton will discourage competitors from encroaching on its business. Higher profit margins often encourage entry by competitors who are attracted by potential profits. By lowering prices, Peloton sends a message to competitors to stay away. The decision may be beneficial in the long run, but it could adversely affect revenue and profits in the near term.
The market is falling out of love with Peloton stock
For its fiscal first quarter of 2022, analysts on Wall Street expect Peloton to report revenue of $810 million and a loss per share of $1.07. The revenue estimate is above the $800 million Peloton has guided for the quarter. Regardless, even if Peloton hits Wall Street revenue estimates, it would be a paltry 8.4% increase from the same quarter last year.
The market is not responding well to Peloton's decelerating growth. The stock is down 41.3% year to date. Management can help stop the bleeding if it reports a better-than-expected customer response to the lower prices on its bike.
