It's been a wild ride for connected-fitness business Peloton Interactive (PTON 3.45%). After the pandemic led to a surge in revenue, the subsequent ongoing economic reopening has crushed consumer demand for the company's expensive bikes and treadmills. And so, as of April 29, this consumer discretionary stock is now priced 30% below what it was at the initial public offering in September 2019.
Better days could be on the horizon, though, when the company reports third-quarter 2022 financials on May 10. If Peloton surprises to the upside by adding more connected-fitness (CF) subscribers -- those who own a piece of equipment -- than expected in its fiscal 2022 third quarter, which ended March 31, then I think it's possible that the stock rises. Let's take a closer look.
Getting back in shape
Peloton ended 2021 with 2.77 million connected-fitness subscribers, which was 66% higher than the prior-year period. Management previously forecast 160,000 net new CF customers in the just-finished quarter. This would imply 41% year-over-year growth. Although impressive, it's still a sharp slowdown from the massive gains experienced for most of the past couple of years.
But I don't think it's unreasonable to expect Peloton to beat its internal target. On the fiscal 2022 second-quarter earnings call, Chief Financial Officer Jill Woodworth pointed out that consumer interest in at-home fitness options is higher than it was before the pandemic started. That doesn't necessarily directly translate into revenue for the company, but it's a meaningful trend to follow.
Additionally, a new pricing bundle called the One Peloton Club -- along with lower prices for the Bike, Bike+, and Tread equipment -- could help spur demand and raise the chances of more CF subscribers than anticipated. Bringing more users onto the platform is obviously in Peloton's best interest, as it leads to more high-margin subscription revenue over time.
Competition and other concerns
However, increased competition in the space, from direct rivals -- like Hydrow, Tonal, and Lululemon's Mirror as well as physical gyms, such as Planet Fitness -- could have a negative impact. And with the summer approaching, exercising outdoors is an option as well. Plus, soaring inflation could force consumers to cut down on discretionary purchases.
Furthermore, even if Peloton beats management's guidance for CF subscribers, the stock isn't guaranteed to experience a pop. The business increased its sales and marketing expense 97% year over year in the last quarter. And from the third quarter of 2021 through the second quarter of 2022, it posted a cumulative net loss of over $1.1 billion. Clearly, if costs continue running out of control, investors will remain bearish on the stock. Nonetheless, a growing user base signals that demand trends are still heading in the right direction.
Peloton shareholders are desperately hoping for a turnaround for this once high-flying company. We'll get more clues on the probability of success when fresh financials are released on May 10.