Shares of connected fitness specialist Peloton Interactive (PTON 5.28%) have been absolutely pummeled this year. As of this writing, shares have slid a total of about 75% in 2021. Of course, this follows a year in which the stock soared more than 400%. But the stock's fall in 2021 notably means that shares are trading only 36% higher than where they were at the beginning of 2020. This means the growth stock has significantly underperformed the S&P 500's 49% gain (when including dividends) over this same period. Suffice to say, Peloton hasn't been a great stock to own lately.
But it sometimes makes sense for investors to look into investing in situations like this, where fear is currently the dominating emotion. Perhaps Peloton's sell-off has gone too far, creating a buying opportunity. Let's take a look to see whether shares look attractive today.
Peloton Tread. Image source: Peloton Interactive.
Why shares have been hammered
The main reason for Peloton stock's decline this year has been a dramatic deceleration in the company's growth. In the company's first quarter of fiscal 2022 (Peloton's most recently reported quarter), revenue grew just 6%. This compares to 232% revenue growth in the year-ago period.
Capturing the deceleration in Peloton's business, here's how the company's revenue growth rates fared in the three quarters leading up to the first quarter of fiscal 2022. Revenue for the company's second, third, and fourth quarters of fiscal 2021 increased 128%, 141%, and 54%, respectively.
To be fair, Peloton's year-ago comps are incredibly difficult. For example, 232% growth in the first quarter of fiscal 2021 is astronomical.
Two other investor concerns regarding Peloton have been voluntary product recalls that have negatively impacted revenue and a decline in monthly workouts per connected fitness subscription. Workouts per subscription in the company's most recent quarter were 16.6, down from 19.9 just three months earlier and 20.7 in the year-ago period.
Of course, it's not necessarily a big surprise to see a dramatic slowdown in sales as the company faces tough comps, and declining average workouts per subscription as people are spending more time outside of their homes. Peloton was an obvious beneficiary of lockdowns, so it makes sense for growth to wane as the economy reopens.
What about the long term?
The question, of course, is whether Peloton can return to strong growth over the long haul. 2022 could continue to be a tough challenge as a pull-forward in demand for Peloton's products, due to a surge in interest in working out from home, can make near-term growth difficult. But the best case investors have for the strong interest in the company's products in a more normalized environment is Peloton's pre-COVID growth rates. Traveling back to the company's second quarter of fiscal 2020 (a period that ended on Dec. 31, 2019), Peloton was growing its revenue at a rate of 77% year over year. Connected Fitness Subscribers nearly doubled over that same time frame. Average monthly workouts per subscriber were 12.7, up from 9.7 in the year-ago period.
While Peloton is unlikely to return to sales growth like this, as the market for connected fitness products has become far more competitive since then, revenue growth could return to double-digit growth rates by 2023. After all, Peloton has impressive brand recognition as the company that made connected fitness popular. In addition, Peloton did a great job of solidifying itself as a high-end brand, potentially giving its products more pricing power than competitors over the long haul.
The final bull case for Peloton is that the lifetime value of its customers is likely very high, since it's not just hardware Peloton is selling -- it's a pricey monthly subscription. Making a strong case for a very high lifetime customer value, Peloton's average net monthly connected fitness churn rate remains very low -- at just 0.82%. "When combined with our low average monthly churn, we continue to believe our platform has proven uniquely able to captivate, motivate, and retain Members," management said in the company's most recent quarterly shareholder letter.
While it may not be wise to bet heavily on Peloton stock, this sell-off is starting to make shares look quite attractive, perhaps justifying a small position in the company's shares. Low churn rates combined with the company's brand recognition and pre-pandemic momentum suggest that sales growth could eventually pick up quite nicely. Though investors will have to be patient, as next year could be tough; Peloton's recent demand surge remains a formidable hurdle for near-term growth rates.
