Peloton Interactive (PTON 5.99%) has been quite the story, not only this year, but since it went public in 2019. Its sales skyrocketed when the pandemic started, but now that more people are returning to their prior fitness habits, the company can't keep up with its earlier pace. Was it a poor decision to scale up its business as rapidly as it tried to?
Certainly, it now faces headwinds as demand for its pricey equipment wanes. The stock price has fallen by 78% in the past 12 months, almost entirely erasing the gains it made since the U.S. first began its COVID-necessitated lockdowns. Will it ever go back to those levels?
Too big, too fast
When the pandemic began, Peloton experienced growth at a rate many companies can only dream of. Its growth was slowing prior to the health crisis, but starting when lockdowns took effect, it experienced four consecutive quarters of triple-digit-percentage growth year over year.
In response, management took aggressive action, opening new factories and acquiring smaller companies. It made deals with partners and announced new ventures.
Looking back, perhaps management should have seen that growth would taper off quickly and addressed the issues of high demand a bit differently. In its defense, those growth initiatives were meant to be just that: tactics to help keep demand high even after the pandemic surge leveled off. It didn't quite work out that way, and the company was saddled with high expenses at a time when fewer people were buying new equipment.
When management released Peloton's fiscal 2022 second-quarter earnings last week, it made a host of announcements intended to allay investors' fears about growth stagnation and where the company is going. Foremost on that list was the hiring of a new CEO. Not too much further down was the fact that the company will restructure (a plan that includes downsizing and shutting down factories) with the goal of achieving $800 million in annual cost savings.
Those moves were widely praised, and Peloton's stock price rose on the news. That was a welcome change for shareholders. But the price increase was minimal in the grand scheme of things, and has since moderated a bit.
Opportunity or value trap?
The prognosis for Peloton's business is optimistic at this point. There are many healthy signs. Despite the slowdown, revenue still grew year over year in its fiscal second quarter (which ended Dec. 31), and that 6% increase was in line with management's expectations. Connected fitness subscriptions grew by 66%, and connected fitness workouts increased by 26%. Average monthly workouts per subscription were 15.5 compared to 21 in the prior-year period. That's not necessarily a bad sign, as people are getting out more now and creating lifestyles that combine at-home fitness with outdoor activities and other fitness programs.
The good part is that they're not sidelining their Pelotons; they're keeping them as part of the overall mix. Connected-fitness subscriber churn remained low at 0.79%, and the 12-month retention rate remained high at 92%. All of this points to a business that can succeed over the long term with the right growth strategy and cost structure.
For Peloton's fiscal third quarter, which ends March 31, management is forecasting a 41% year-over-year increase in connected fitness subscriptions and a 23% decrease in revenue at the midpoint. That would be its first revenue decline as a public company, and it reflects the fact that it's just at the beginning of revamping itself and hasn't yet hit rock bottom.
On the positive side, even though margins will remain pressured in the quarter, it should begin to implement its restructuring plan and start making efforts to return to profitability.
Current Peloton shareholders should hold on tight, as the price is likely to rebound as well at some point. Previously, I've cautioned prospective investors to hold off on buying shares, which come with a huge amount of risk as the company gets itself together.
But I would say that risk-tolerant investors might want to consider adding shares now, as the prospect of the stock gaining from here does seem likely. Keep in mind, though, that even if it does, Peloton stock might not hit its previous high anytime in the near future.