What happened
Week to date, shares of Peloton Interactive (PTON 4.29%) were trading down 17% as of 1:29 p.m. ET on Thursday, according to data provided by S&P Global Market Intelligence.
The drop comes after Peloton announced it was shifting its manufacturing from company-owned facilities to Rexon Industrial based in Taiwan.
Despite the positive step to bring costs down, market participants are likely viewing this move as a sign of further weakness in sales.
So what
Demand for Peloton's bikes and treadmills has collapsed lately. In the company's fiscal third quarter ending March 31, revenue fell 24% compared to the year-ago quarter.
The drop in sales of new exercise machines has led to inventory piling up in warehouses, which is costing Peloton a lot of money. The company reported a whopping loss of $757 million in the last quarter.
New CEO Barry McCarthy stepped in earlier this year, and his top priority has been to bring supply in line with demand so Peloton can return to profitability. Outsourcing manufacturing to Rexon is a big step in that direction.
Now what
This is part of management's plan to realize at least $800 million in annual savings over the next two years. At a price-to-sales ratio of 0.70, Peloton looks cheap, but it needs to prove it can deliver sustainable revenue growth along with a healthy profit margin.
On that score, it's a good sign that Peloton is still growing its total member count across the Peloton app and connected fitness products, increasing 29% year over year to reach 7 million last quarter. McCarthy is maintaining a long-term goal of reaching 100 million.
