For all of the talk it generates, it's hard to believe that Peloton Interactive (PTON 0.31%) has only been on the stock market for just over two years. It's had massive ups and downs in that time frame, and it's currently down 76% from its all-time high of $162 exactly a year ago. The company's been making headlines for the past two weeks, but it's not moving the stock all that much. That's because not all news is good news.
Flagging sales, falling stock price
Peloton burst onto the scene right before the pandemic closed down gyms across the globe and kept fitness enthusiasts tied to their home fitness options. Without the ability to even take a jog around the block in many cases, people flocked to Peloton's connected fitness equipment. What takes it up a notch above the simple stationary bike, for example, is the connected fitness aspect. Peloton's platform offers a premium library of classes with fitness instructors, including live classes, connecting exercisers with a social workout platform.
That was a lifeline for the company's customers. Quarterly revenue increased as much as 232% year over year in the fiscal 2021 first quarter, and this growth was at triple-digit levels for four consecutive quarters.
That's what made the 2022 first-quarter earnings report so shocking. Sales came in at $805 million, significantly below management's expected $810 million, and demonstrating a meager 6% year-over-year increase. Although that's not as bad as it seems, considering it comes on top of 232% growth last year, it was still below estimates, and investors don't like to see such a steep drop. But that was only one part of the misery.
Even worse that the stunning sales deceleration was the cut in expected full-year sales. Management slashed its outlook from $5.4 billion to $4.6 billion at the midpoint. A number of factors contributed to the dismal decrease. Supply chain issues that have been plaguing many manufacturers are causing trouble for Peloton as well. Internet traffic dropped more than management anticipated, and at the same time, foot traffic to physical stores didn't pick up as quickly as anticipated.
Peloton made an interesting move over the summer when it cut the price of its original bike. The idea was that opening up to a new demographic would generate higher sales as pandemic-induced interest began to wane. Indeed, the price decrease contributed to higher e-commerce conversion rates, but it wasn't enough to offset slowing sales.
That brings us to this week's news.
Is all news good news?
The one-time pandemic darling looks like it's dealing with some pretty serious issues. Add to that a new HBO Max TV show that came out last week, And Just Like That..., a sequel to the popular Sex and the City franchise, featuring the Mr. Big character dropping dead after a Peloton workout. Analysts agreed that the TV episode contributed to a 12% drop in Peloton's stock price last week.
The company took quick action to negate the negative publicity and immediately shot an ad featuring the character, very much alive, with the Peloton instructor who plays opposite him. The narrator, actor Ryan Reynolds, explains that "And just like that, the world was reminded that regular cycling stimulates and improves your heart, lungs, and circulation, reducing your risk of cardiovascular diseases."
The ad went viral, and after a light uptick, the stock price has remained stable at around $38. But the saga doesn't end there -- Peloton pulled the ad Thursday after the actor who played Mr. Big was accused of misconduct.
Whew. That's a lot to keep up with.
Should we keep talking about Peloton?
Peloton stock may not look so hot right now. The near-term outlook is seriously compromised as the exodus from staying at home is still in full swing.
But the long-term outlook looks better than you might realize. According to third-party data, Peloton is increasing its overall share of the home fitness market. Membership is still growing nicely, from 5.9 million in Q4 2021 to 6.2 million in Q1 2022. Connected fitness subscriptions increased from 2.33 million to 2.49 million over the same period, and paid digital subscriptions increased from 874,000 to 887,000.
Connected fitness workouts and average workouts per subscription have decreased. That's logical as people leave their homes. But increased members and subscriptions demonstrate that people are still connecting, even if they are engaging less.
And that's why Peloton is still very much in the game. The pandemic threw off the normal trajectory, but it's now proceeding the way management would have envisioned it. This means pressure as it all evens out, but a likely return to growth and profitability is in the not-too-distant future. As the price bottoms out, you might want to take a small position, but if it feels too risky, keep it on your watch list.