Peloton Interactive (PTON -0.98%) was a pandemic darling. Its at-home exercise equipment is fitted with digital tablets packed with virtual classes and the ability to stream content, making it the perfect companion for a workforce confined to lockdowns and work-from-home arrangements.
After hitting a pandemic-low price of $19.72 a share in March 2020, Peloton stock soared 725% by December of that year. But as society has progressively reopened and Peloton suffered through some issues, the stock took a steep fall back to Earth, losing 83% of its value.
Image source: Peloton.
Here are two key reasons the company might struggle to return to its former glory and one reason it could stage a comeback.
Reason to sell: User engagement has collapsed
Declining user engagement has really hurt Peloton stock. The company is still growing its subscriber base, albeit at a slower pace compared to fiscal 2020 and 2021, but the time subscribers are spending on the Peloton app and equipment has fallen off a cliff.
The average number of workouts each subscriber does every month is tracked by Peloton, and since peaking in the third quarter of fiscal 2021 at 26, it has declined by 40% to 15.5 most recently. This is represented by the orange line below.
As people are now spending less time at home, and with fitness centers reopening across the globe, it appears that at-home workouts are falling out of favor.
If monthly workouts continue to dip, there could be a declining benefit for users with respect to paying for a Peloton subscription, or even owning Peloton equipment, compared to having a gym membership instead. Also, it makes users less likely to transition from a base-level subscription to the Peloton app to an all-access subscription plus ownership of a Peloton hardware product.
Reason to sell: Revenue growth has stalled, and losses are climbing
Falling engagement has flow-on effects that can include declining sales. As a result, Peloton is experiencing stagnant revenue growth, which is triggering the company's net loss to grow significantly.
In the first six months of fiscal 2022, Peloton spent $633 million on marketing, which was a 117% increase compared to the same period in fiscal 2021. But its revenue only jumped by 6% over the same timeframe. Put simply, the company is seeing diminishing returns from its marketing efforts, and it's struggling to generate more sales despite a soaring investment in capturing the attention of consumers.
When a company spends an increasing amount of money but fails to generate an equal increase in revenue, losses tend to expand as the above chart depicts.
Looking at the bigger picture, analysts expect Peloton to generate $3.7 billion in revenue during the fiscal 2022 full year. If they're correct, it would translate to a 7% contraction compared to fiscal 2021. This is a key reason Peloton stock has collapsed by 83% -- few investors want to put money into a business that isn't growing.
Reason to buy: Under new management
One reason to pin your hopes on Peloton might be its new CEO, Barry McCarthy, who brings a wealth of experience as a former Chief Financial Officer (CFO) of both Spotify and Netflix. One person typically isn't enough to turn a company of this size around, but in this case, there are some radical changes in the works.
Peloton could lean further into the fitness-as-a-service business model, reducing the up-front costs of its equipment in exchange for a higher recurring subscription price. That would allow more users of different income levels to access its products, and tests have already begun. At the same time, the company is drastically cutting costs by reducing its corporate workforce by up to 20%.
Finally, there could be a greater focus on Peloton's digital attributes. It's possible the ecosystem could host its very own app store, with developers (and other fitness providers) tapping into the Peloton user base to grow their own businesses in exchange for a fee. This would unlock brand new revenue streams for the company.
But these changes could take years to come to fruition. Investors might be best served waiting on the sidelines until the financial picture begins to turn around and the uncertainty starts to fade.
