As much as any other stock, Peloton Interactive (PTON +1.39%) has been the poster child for the pandemic bust.
The connected-fitness stock was one of the big winners of the pandemic era as sales boomed during the lockdowns and its share priced soared as high as $171 in Jan. 2021, but since then it's fallen by more than 75%. Sales growth has ground to a halt, and the company has put up wide losses as it mistakenly bet on a continued expansion even as it faced headwinds from the economic reopening.
Image source: Peloton.
The company's challenges came to a head in February when co-founder and former CEO John Foley stepped down following several unforced errors and in response to pressure from an activist investor. The company named Barry McCarthy, the former CFO of Spotify and Netflix, as the new CEO, and it also announced a cost-cutting program that included layoffs, the closure of a domestic factory that had been under construction, and a shift to third-party supply-chain partners to give it a more variable cost structure.
Though the stock spiked when that news was announced in early February, it has since cooled off. Investors seem to have realized that any turnaround will take time as the business still faces a number of challenges. Let's take a look at a couple of charts that show why a recovery won't be easy.
Inventory is a burden
PTON Inventories (Quarterly) data by YCharts.
First, you can see in the chart above that revenue growth has fallen to single digits just as the company has sharply ramped up inventory and sales and marketing expenses. For most of its history, Peloton carried less than a quarter's worth of inventory, but it now has too much product on hand, significantly more than one quarter's worth of sales. For the fiscal third quarter, the company is actually forecasting a 21% to 25% decline in revenue to between $950 million and $1 billion. That decline also comes as the company's sales and marketing expenses have ramped up.
NASDAQ: PTON
Key Data Points
Maintaining the proper level of inventory is crucial for consumer products businesses. Without enough inventory, you lose sales. With too much, your carrying costs go up and you're forced to mark down your product, which is the situation Peloton finds itself in today. Even upping its marketing expenses hasn't been enough to reverse that trend.
Subscriber interest may have peaked
Peloton has two types of subscribers, connected-fitness subscribers and digital subscribers. The former pay $39.99/month and own Peloton equipment, which they often finance. The lastter pay $12.99/month for the Peloton app and use their own equipment.
Peloton is focused on connected-fitness subscribers because they're more valuable and have made the commitment of buying Peloton equipment. However, digital subscribers may be more indicative of the trajectory of the business, and the chart below shows digital subscriptions have already plateaued. They even declined to 862,000 in the most recent quarter.
Image source: Chart by author. Data from company filings.
Indeed, Peloton is now forecasting a slowdown in connected-fitness subscriber growth. After finishing the second quarter with 2.77 million connected-fitness subscribers, it expects to add 160,000 in the current quarter but just 70,000 in the following quarter, and the decline in digital subscribers, which would portend more headwinds for the company, seems likely to continue.
A brave new world
The tailwinds that were so beneficial to Peloton have quickly caused problems for the company as the ongoing reopening is likely to weigh on the company's performance over the next year. In addition to that challenge, Peloton also must cut costs, adapt to a new CEO, and adjust its business model. The brand is strong enough to continue to grow over the long term, but 2022 is likely to be a difficult year for the connected-fitness leader.
