The coronavirus pandemic provided at-home fitness pioneer Peloton Interactive (PTON 6.18%) with the perfect environment to flourish. Thanks to stay-at-home orders, workout enthusiasts couldn't go to the gym to complete a sweat session. Instead, they needed ways to exercise at home, and Peloton was there to answer the call.
This year has been a totally different story, however. Peloton stock has shed over 70% of its value in 2021, and I believe the former Wall Street darling's best days are behind it. Here's are three reasons why I think it's time for investors to part ways with this once high-flying stock.
1. Peloton is seeing falling engagement
In the most recently ended quarter (fiscal 2022 first quarter), connected-fitness subscribers, or those who purchased a piece of equipment and pay the $39 monthly fee, completed an average of 16.6 workouts per month. This was the second straight quarter of falling engagement, and it was the lowest since the second quarter of 2020 (almost two years ago).
"It is clear that we underestimated the reopening impact on our company and the overall industry," CFO Jill Woodworth pointed out on the Q1 earnings call. Even after cutting the price of its flagship product, the Bike, by $400 to $1,495 earlier this year, demand trends are failing to meet expectations.
Supporting the argument that Peloton is falling out of favor with consumers was a churn rate of 0.82% in the three-month period, up from 0.73% in the previous quarter. Churn is a measure of the cancellations net of reactivations in the quarter, so a lower figure here is obviously better.
The ongoing economic reopening could be to blame for much of Peloton's recent woes. Whether this is a blip on the company's radar is yet to be seen. Either way, the direction the business is heading in makes it hard to be optimistic.
2. Peloton management is changing course
When asked by a Wall Street analyst during the Q1 earnings call in early November about Peloton's balance sheet and cash position, Woodworth replied by saying, "We don't see the need for any additional capital raise based on our current outlook." But less than two weeks later on Nov. 16, Peloton made headlines by issuing $1 billion of common stock to be used for general corporate purposes.
I immediately wonder what new information Peloton's executive team came across in such a short time period that caused them to change their financial plan. That capital raise is 8.5% of Peloton's current market capitalization of $13 billion, a substantial dilution for existing shareholders to be sure.
Peloton will have to spend a lot more on sales and marketing, an expense category that was up 148% year over year. And in order to continue driving interest from consumers for its premium equipment, the business needs to keep investing in research and development (up 167% year over year) to bring new products and features to market. These difficult conditions are happening while demand, as I noted above, seems to be waning.
3. A Peloton competitor cut its forecast
Peloton meaningfully cut guidance for the full year 2022 when it reported earnings on Nov. 4. Management now expects sales of $4.4 billion to $4.8 billion, compared to prior guidance of $5.4 billion.
Investors might be encouraged at first to assume that demand issues are specific only to Peloton. This could be viewed positively in the hopes that maybe the leadership team can turn things around with new strategic initiatives. But according to Lululemon Athletica's (LULU -1.08%) latest financial update, the entire at-home fitness industry is facing weakness.
Lululemon's management team significantly cut the full-year revenue forecast for its Mirror segment, a direct competitor to Peloton, from $262.5 million (at the midpoint) just two quarters ago to $127.5 million (at the midpoint). Higher customer acquisition costs were the reasoning, not surprising given the rising marketing expenditures that Peloton is facing as well.
If you've been a Peloton shareholder since the pandemic started, you've been on quite the roller-coaster ride. It might be tempting to hold on to shares based solely on the seemingly cheap valuation and just how much pessimism is surrounding the business today. However, decreasing customer engagement, a management team that lacks transparency into the company's financial position, and overall pressure for the whole industry all make this an easy decision.
Don't wait for a turnaround. It's probably time to sell your Peloton stock.