What happened
Shares of connected-fitness company Peloton Interactive (PTON 4.29%) plunged 21.7% in April, according to data provided by S&P Global Market Intelligence. And it seems like the entirety of the drop relates to some negative third-party data cited by a prominent analyst.
So what
Peloton generates revenue by selling exercise hardware and subscription-streaming exercise content for these hardware devices. Business has been slow lately for the company, with hardware revenue down 52% year over year in the most recent quarter. And one analyst believes business is still slower than expected.
On April 12, Morgan Stanley analyst Lauren Schenk cited third-party data that suggests a 27% year-over-year decline in web traffic for Peloton in its current quarter. Because of this slow web traffic, Schenk believes the company is unlikely to give investors much of a pleasant surprise when it reports financial results for the fiscal third quarter of 2023 on May 4.
Therefore, Schenk gave Peloton stock a price target of $4.50 per share, according to The Fly, implying roughly 50% additional downside from where the stock trades today. And Peloton stock rapidly dropped for the remainder of April following this commentary.
Now what
Attempting to remain completely objective here, investors' fears regarding web traffic may be overblown. After all, third-party data isn't always accurate. Moreover, a 27% decline in Peloton's web traffic doesn't necessarily mean lower hardware sales for Q3.
In fact, it may even be reasonable to expect a decline in web traffic for Peloton, considering the company started selling through other retailers, including Dick's Sporting Goods and Amazon, within the last six months or so. These new sales channels could be diverting traffic away from Peloton -- but they could also be boosting sales.
All that said, it's still entirely possible that the information regarding web traffic is indeed accurate. And the assumed implications by Schenk could also be correct. Therefore, these concerns shouldn't be flippantly dismissed, either.
To be clear, hardware sales are particularly important for Peloton right now. Its operations are extremely unprofitable, and it has way too much inventory. Therefore, management is trying to move inventory and turn around its cash-flow situation.
The chart shows that this plan is starting to work.
PTON Inventories (Quarterly) data by YCharts
Subscription revenue is extremely important for Peloton long term, and it's an area of focus. But near term, the company needs to further decrease its inventory of hardware devices as soon as possible to create more cash flow. Therefore, this is an area to watch when Peloton reports fiscal Q3 results on May 4.
