Please ensure Javascript is enabled for purposes of website accessibility

Don't Overlook These Crucial Factors in Peloton's Sales Deceleration

By Parkev Tatevosian, CFA – Dec 2, 2021 at 5:45AM

Key Points

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Reopening economies are not the only headwind Peloton is facing.

Interactive exercise equipment maker Peloton (PTON 2.58%) is experiencing a meaningful slowdown in sales growth. It thrived during the pandemic while many gyms were closed and folks were spending a lot more time exercising at home. 

Now that gyms, and economies more broadly, are reopening, Peloton's sales growth looks out of breath. However, reopening economies are not the only reason Peloton's sales are decelerating. Here are some additional factors causing a slowdown. 

A group of people on exercise bikes.

Image source: Getty Images.

Peloton's product sales decrease year over year

Peloton reported its fiscal year 2022 first-quarter financial results on Nov. 4. Peloton generated overall sales of $805 million, a 6% increase from last year's same quarter. Peloton breaks sales into two segments: Connected fitness products and subscription revenue. Peloton's machines come with large screens where members can view live or recorded classes, included with a monthly subscription fee.

Interestingly, in Q1, sales of connected fitness products decreased by 17% from last year, while subscription revenue increased by 94%. Peloton's connected products segment is much larger -- subscription revenue made up only 38% of revenue in Q1. That's why overall sales only grew 6% even though its subscription revenue grew substantially -- the effects of the slowdown in product sales were more potent.

Growing revenue by 6% may not look like such a bad sign in isolation. However, in Peloton's previous eight quarters, the slowest rate of revenue growth was 54.3%. Moreover, in five out of its last eight quarters, Peloton increased revenue by over 100% year over year.

Several factors causing a growth deceleration for Peloton

The coronavirus pandemic is playing a role in shifting sales of Peloton's in-home exercise equipment. At the pandemic onset, demand for its products surged as folks were expecting to be cooped up at home for a long time. Thankfully, billions of doses of effective vaccines have been administered, and that's making people comfortable leaving their homes to exercise outside or at gyms. 

Note, however, that there are other factors in play. Consider that Peloton issued a significant product recall in 2021 and lowered the price of a popular product by 25%, and revenue from this year is being compared with surging levels from last year. 

Tragically, several incidents of severe injury and even deaths involving Peloton's treadmill were reported earlier in 2021, and management ultimately decided to recall the product and issue full refunds to customers. As you may already know, a return counts against revenue, and these returns are a headwind to Peloton's revenue growth.

One of Peloton's long-term goals is to get into as many households as possible with its connected fitness products, and the price of its premium products has slowed the achievement of that goal. Some households may have wanted a Peloton bike, but at $1,995, it was unaffordable. Therefore, management lowered the price of Peloton's bike by $400 to $1,495. The change adds Peloton's products to more households, but it also slows revenue growth because unit sales are not increasing enough to offset the lower price per unit.

Finally, Peloton is going up against tough revenue comparisons from last year. For instance, Peloton's revenue increased by a whopping 232% in the September quarter last year. Increasing sales by 6% in this year's September quarter on top of the 232% growth from last year is not so bad.

Peloton's stock is down 71% year to date in 2021. It's now trading at a price-to-sales ratio of 3.3, the lowest it has traded for in its young history as a public company. Investors who are confident in Peloton's long-term prospects have an excellent opportunity to accumulate shares at these prices.

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Peloton Interactive. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.