What happened
Shares of Peloton Interactive (PTON +0.78%) were taking a dive this week in response to a report from Morgan Stanley that showed that web traffic for the connected fitness leader was down substantially in its fiscal third quarter, which ended in March.
The stock fell around 11% on Wednesday when the report came out and has continued to slide since then. For the week, the stock was down 15% as of Friday at noon ET, according to data from S&P Global Market Intelligence.
NASDAQ: PTON
Key Data Points
So what
Morgan Stanley analyst Lauren Schenk cited a report from SimilarWeb, the web analytics service, showing that web traffic fell 27% in the fiscal third quarter year over year as the company pulled back from the significant promotions it had used in the second quarter.
Schenk said she did see "slight upside" to its subscriber guidance but doesn't expect a significant earnings beat. She maintained an equal weight rating and a price target of $4.50, implying more than 50% downside in the stock.
Peloton's most recent earnings showed the company continuing to struggle with membership, meaning the total people using its subscriptions, as that number was flat at 6.7 million. Meanwhile, connected fitness subscriptions rose 10% to 3.03 million, driving a 22% increase in revenue to $411.3 million.
However, product sales continued to fall sharply, a sign that the brand is losing traction with new customers and it's fallen out of fashion as a holiday gift. Product revenue declined 52% to $381.4 million in the fiscal second quarter.
Peloton did narrow its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss from $266.5 million to $122.4 million, but the company still seems to be a long way from profitability, considering that the holiday quarter is typically its strongest seasonally.
Now what
It shouldn't be too surprising that Peloton is facing difficult comparisons with web traffic from the quarter a year ago. That was when the omicron virus peaked across the country, giving companies that thrived during the COVID-19 pandemic like Peloton another boost.
Since that was the last major spike in COVID cases, comparisons for Peloton should get easier from here. However, the company still has a lot of work to do to become profitable, and it won't be easy to do in the current economic environment. Consumers are being pinched by inflation, and spending has shifted to areas like travel and restaurants to make up for lost opportunities during the pandemic.
Given these realities, investors shouldn't expect a recovery in the fitness stock anytime soon.
