Peloton Interactive (PTON 4.75%) stock got torched Friday after the company slashed its guidance, and growth nearly ground to a halt with revenue rising just 6% to $805.2 million. Hardware sales crumbled as the pandemic boom, which had driven the stock to great heights, faded.

It seemed predictable that sales of the pricey bikes and treadmills Peloton sells with attached digital subscriptions would eventually peak, but the company didn't anticipate that happening so soon. Just as consumers are returning to their pre-pandemic routines, Peloton ramped up spending. Sales and marketing expenses jumped by 148% to $284.3 million as the company spent heavily on advertising the price reduction in its bike along with a new, lower-priced treadmill. Expenses also rose sharply in categories targeting long-term growth like research and development as well as headcount.

While the reopening led to a slowdown in overall growth, the subscription side of the business remained strong. Connected fitness subscriptions continued to grow, adding 161,000 in the quarter to bring the total to 2.49 million. And churn wasn't a problem -- the company reported a 12-month retention rate of 92%, meaning it only lost 8 out of every 100 subscribers over the past year.

While Peloton members aren't working out as often as they were during the pandemic, the 16.6 average monthly workouts they did in the fiscal first quarter was still better than pre-pandemic levels.

A woman on a Peloton bike in her bedroom

Image source: Peloton.

Shooting yourself in the foot

Peloton's results in the first quarter, which include the acquisition of exercise equipment manufacturer Precor, show the company spending like the reopening was going to have no effect on its business. That clearly wasn't the case. Inventory more than tripled from the year-ago quarter even as overall revenue only inched higher while sales of its bikes and treadmills actually fell 17%.

In other words, there was a gross misreading of customer demand on the part of management, and that could lead to inventory write-downs in the future or at least markdowns on equipment. Management acknowledged that fiscal 2022 "would be a very challenging year to forecast" in its shareholder letter, adding, "a softer than anticipated start to Q2 and challenged visibility into our near-term operating performance is leading us to recalibrate our fiscal year outlook."  

Full-year guidance called for about 15% revenue growth after 120% growth in fiscal 2021. Though key metrics like subscriptions and churn remain strong, it's clear from the decline in equipment sales that the company is facing headwinds from the economy's reopening. A quote from Netflix CEO Reed Hastings may best sum up the dilemma Peloton faces now as lockdowns end:

"Some of the lockdown growth will turn out to be pull-forward from the multi-year organic growth trend, resulting in slower growth after the lockdown is lifted country-by-country. Intuitively, the person who didn't join Netflix during the entire confinement is not likely to join soon after the confinement."

The same is likely true for Peloton, another subscription company that benefited from the stay-at-home nature of the pandemic. If you made it through these many months without buying a Peloton or trying out one of its fitness classes when buzz about the brand was everywhere, why would you try it now with gyms reopening and the pandemic restrictions easing? It's a much tougher sell for the company.

Gyms aren't dead

At the same time that Peloton stock has been collapsing, another fitness stock has been rising to an all-time high. Planet Fitness (PLNT 2.00%) just reported third-quarter earnings and said it had over 15 million members, more than it had when the pandemic started. Not only does that number dwarf Peloton's subscriber base of 2.5 million, but it also belies the argument that the pandemic killed gyms and that connected fitness is taking over the industry. 

Peloton bulls like to point out that the company is chasing an addressable market of 67 million households, but the fitness industry is highly fragmented, barriers to entry are low, competition is vast, and much of it is free. YouTube is full of workout classes in all flavors, and there are plenty of free exercise options like running or biking once you step outside your front door. 

Given that reality as well as the economy's reopening, the buzz around Peloton during the pandemic is unlikely to return. Neither is its market cap of $50 billion, where it peaked earlier this year. The stock is now down more than two-thirds from its high.

While it's too soon to call Peloton a fad -- after all, those subscriber metrics still look solid and churn is low -- management has a lot of work to do to align operations with a more normalized level of demand. And the stock's slimmed-down valuation understandably reflects that challenge.