Peloton Interactive (PTON +4.99%) stock hit new lows this month as investors pulled their money out on fears about its growth prospects and profitability. It's down more than 80% over the past year after the price shot up following a year of triple-digit growth and then crashed as growth decelerated and management warned of a further slowdown.
A series of announcements last week added the next chapter to the saga. The company said it would be tacking on high delivery and setup fees for its bikes just a few months after slashing the price of its standard bike to open it up to a broader market. The stock price went up after the raise was announced, but it plummeted the next day when word got out that the company was slashing production, and it gave a preliminary update on discouraging fourth-quarter results.
Image source: Peloton Interactive.
Only a pandemic success?
Peloton was red-hot during the pandemic, posting year-over-year sales increases as high as 232% in the 2021 first fiscal quarter, ended Sept. 30. People quickly switched to home fitness options as gyms closed and lockdowns were enforced, and Peloton's sales soared. The company went public at the end of 2019 in a twist of fate that positioned it for high gains as the pandemic went global just a few months later.
Growth began to slow in the summer as people were going out again, and in Q4 2021, sales increased 54% year over year. That slowed to 6% in the 2022 first fiscal quarter, with guidance of 8.5% at the midpoint for the second quarter.
The balloon just popped
Peloton was busy last week. First, it posted a notice on its website that it would be charging an extra $250 for bike setup and an extra $350 for treadmill setup. That comes on the heels of a management decision to lower the price of its standard bike in August by $400 to $1,495. Sales growth was beginning to taper off, and it was a decision to open up the market to a broader shopping cohort and increase sales. It was a gamble, and right now, it doesn't look like it paid off. The timing may have been off. It happened just when supply chain disruptions and inflation began to make headlines, and Peloton seems to be having a hard time absorbing the price reduction. That already doesn't look very promising from a business standpoint if the demand increase it was expecting isn't enough to offset the costs.
Then, on Thursday, there were media leaks about cost-cutting measures. According to the Wall Street Journal, management sent a note to employees about erroneous reports on various news outlets. The note also shared that, contrary to the earlier and unfounded media reports, the company wasn't necessarily cutting production, but it was evolving to "more seasonal demand curves," and it was "resetting our production levels for sustainable growth."
Finally, on the same day, it gave a preliminary report of $1.14 billion in Q4 sales, just below the midpoint of its guidance, and a 7.5% year-over-year increase. Connected fitness subscriptions of 2.8 million came in slightly below guidance, and earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at a loss of $260 million to $270 million, slightly above guidance of $325 million to $350 million. CEO John Foley said, "We are taking significant corrective actions to improve our profitability outlook and optimize our costs across the company." Those may include layoffs, according to the note to employees. Foley also said the actions could entail a move to a more variable cost structure, which fits with the strategy of meeting seasonal demand curves.
Is there any hope left for Peloton investors?
For any shareholders still hoping for the best, the game isn't over yet. Peloton is in an unusual situation as it's still normalizing after an unexpected burst of business. It had to increase production to meet demands and is now left with decreasing demand as the world gets back to normal.
It's an unenviable position, but there are still optimistic signs. People still love their Pelotons, with a low churn rate that hasn't decreased with slowing demand. That's certainly a viable business. The likely scenario here is that as the company adjusts to slowing demand, it will get its ducks in order and lower costs, eventually becoming profitable again. That may take a while, and it may mean that Peloton is not the growth giant some investors may have envisioned it to be.
For investors who aren't shareholders yet, now doesn't look like the time to jump in, even at this low price. There's too much up in the air to make it a safe investment.
