What happened
Shares of Peloton Interactive (PTON 4.89%) have fallen by more than 10% this week, according to data from S&P Global Market Intelligence. The at-home fitness company posted disappointing earnings as the new management team tried to implement a turnaround strategy for the struggling brand. As of the market close on Thursday, May 4, shares of Peloton are down 14% this week.
So what
Before the market opened on May 4, Peloton updated investors with its quarterly financial results for the first three months of 2023. Revenue declined 22% year over year in the period to $749 million, which actually significantly beat analyst expectations of $708 million in sales. However, earnings per share lagged analyst projections, coming in at a loss of 79 cents vs. the 49 cents estimate. This is likely why shares of the stock dropped so much this week.
Investors are also concerned about the company's forward guidance for its upcoming fourth quarter, which covers the three months ending in June. Peloton is guiding for connected fitness subscribers (i.e., its paying members) to decline quarter over quarter for the first time in its history, going from 3.11 million to 3.08 million. This would still be up from Q4 of last year but does indicate that Peloton is struggling to attract members to its connected fitness service with the pandemic behind us. And it is certainly very far away from its historical goal of reaching 100 million paying members.
The quarter was not all bad, though. Gross profit grew 47% year over year due to a higher percentage of revenue coming from subscriptions (the segment grew 15% year over year). With operating expenses down 42% year over year and inventory finally getting rightsized after overbuilding capacity in 2021, Peloton is getting close to free-cash-flow positive, only burning $55 million this quarter vs. $747 million a year ago. The company still has a lot to fix, but significantly reducing cash burn will give Peloton many years of runway to get this business back on track.
Now what
If you own Peloton stock, it has not been a fun few years. The next few quarters might not be that fun either if connected fitness subscribers start declining. Shares are now down 70% from its initial public offering with a market cap of just $2.6 billion. That is a far cry from its peak market cap of $50 billion in 2021.
This is by no means a low-risk investment. But if the new executive team -- led by Netflix and Spotify legend Barry McCarthy -- can get Peloton back to profitability and growing subscribers, there is a chance the stock will do well over the next few years if you buy at these depressed levels.
