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Peloton Underestimates Reopening Impact: Stock Gets Slammed After Q1 Earnings

By Parkev Tatevosian, CFA – Nov 9, 2021 at 8:52AM

Key Points

  • Peloton's sales still increased over the same quarter last year.
  • It expects the pain to continue as economies reopen in the near term.
  • Peloton's stock is now trading at levels not seen since the pandemic onset.

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A slowdown in sales as economies reopen wasn't the surprise; it was the magnitude that caught Peloton management off-guard.

Peloton Interactive (PTON 7.20%) was one of the prime beneficiaries of pandemic lockdowns. Folks stuck at home, with their gyms closed, looked for ways to maintain healthy exercise habits and Peloton's in-home exercise equipment offered a solution to a temporary problem.

As billions of doses of a vaccine against COVID-19 have been administered, economies have reopened and alternatives to in-home exercise equipment were again available. Peloton management knew this could happen and was ready for some level of slowdown.

But the company's recently released earnings report strongly suggests the magnitude of the reversal in the trend caught management off-guard.

A person on an exercise bike.

Image source: Getty Images.

Peloton suffers as people want to get out of the house

In its fiscal 2022 first quarter, overall revenue increased by 6% from the same quarter last year. This is despite the company lowering the price of its original bike by $400 late in August. The rate of revenue growth was the slowest for the company dating back at least eight quarters. In fact, over the last eight quarters, the lowest revenue growth rate was 54% in the quarter ended June 2021.

Management took time to comfort shareholders disappointed in the company's pessimistic outlook in the near term and remind them of the long-term potential in its shareholder letter: "While we are reducing our near-term forecast, our confidence in and commitment to our strategy is unchanged. Software and streaming media have redefined at-home fitness and are driving a migration of workouts into the home, a consumer behavioral shift that we believe is still in its early stages."

Interestingly, Peloton grew revenue by over 100% per year for six consecutive years before the pandemic onset. It wasn't like lockdowns were the first time the company had a surge in customer interest, and it had a trendy business even before the outbreak.

Part of its success is from engaging interactive classes and a sense of community it fosters between people working out at home. Another reason is the convenience advantage it holds over gyms. Depending on where you live, you might be able to complete a 45-minute exercise class on a Peloton machine at home before you can get to a spot to begin working out at the fitness center. 

Peloton back to where it started in 2021

After more than 18 months of COVID-19 safety protocols, folks may understandably be looking for excuses to leave the house. That's going to hurt Peloton in the near term, and this latest earnings report suggests it could be a deep hurt. However, after the initial snap-back fades away, Peloton has the potential to find itself back in high demand. 

Apparently, though, the market is not willing to wait to find out. Peloton's stock price got slammed by 35% in the day following the earnings announcement. Overall, the stock is down 66.2% year to date. Enthusiasm for its prospects may have been overdone as it reached a price-to-sales ratio over 20 near the beginning of the year. The aggressive sell-off has Peloton now trading at a price-to-sales ratio close to where it was before the pandemic onset.

Peloton management has given investors a ride as sweat-inducing as some of its instructors give its members. The difference is that this is not what investors hoped for

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

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