Shares of connected fitness company Peloton (PTON 0.13%) were gutted on Wednesday following a disastrous quarterly report. Demand for its exercise bikes tumbled, subscription churn was higher than expected, and a major seat-post recall turned out to be far more expensive than the company anticipated.
That recall is particularly problematic. Peloton's brand was tarnished in 2021 by incidents with its treadmills that led to one death and dozens of injuries. The latest recall -- in which seat posts could snap off while in use -- affected the company's original Peloton Bike product sold in the United States. There had been 13 reported injuries when the recall was announced in May of this year.
While Peloton, the company, is in no danger of failing anytime soon, buying the stock is tough to justify.
NASDAQ: PTON
Key Data Points
Tepid demand
With Peloton's brand taking hit after hit, it's not hard to see why consumers aren't eager to shell out $1,500 or more for a Peloton bike. The company sold just $220.4 million worth of products in the fiscal fourth quarter, which ended on June 30. That's down 25% year over year and 32% from the third quarter.
"Peloton's FYQ4 performance is a reminder we operate a seasonal business," explained Peloton CEO Barry McCarthy in a letter to shareholders. That explanation doesn't make a ton of sense, given the steep year-over-year decline. More likely, demand for expensive connected fitness products with a history of dangerous defects has simply declined.
Peloton's subscription business isn't doing much better. Peloton sells subscriptions that are tied to its equipment, as well as stand-alone app subscriptions. The company ended the quarter with 3.078 million connected fitness subscriptions, down 4% from the third quarter, and 828 thousand app subscriptions, down 3%. The decline was partly due to some customers pausing their subscriptions as they awaited their replacement seat posts, although that doesn't explain the drop in app subscribers.
The seat-post issues turned out to be an expensive mistake for Peloton. The company booked a $40 million charge in the fourth quarter related to the recall, and it has yet to fulfill more than half of the seat-post replacement requests.
A tough road ahead
Peloton did manage to cut costs significantly, but the company still posted an enormous loss. Net income was a loss of $241.8 million in the fourth quarter, while free cash flow was a loss of $75 million. The company noted that free cash flow would have been positive $1 million if a legal settlement had been excluded. However, it should also be noted that inventory reductions are creating a temporary tailwind. Peloton ended the quarter with $522.6 million worth of inventory, down more than 50% from one year prior.
Peloton now expects to report negative free cash flow for the next two quarters as it absorbs seat-post recall costs, invests in marketing, and prepares for the holiday season. The company has over $800 million in cash, so it's in no danger of facing a liquidity crisis anytime soon.
Peloton's recently updated strategy involves pushing subscriptions that aren't tied to its hardware. That makes a lot of sense, but so far isn't working. There's a lot of competition in the world of paid fitness apps, including Apple Fitness+. It's unclear whether Peloton has any real competitive advantage in this market.
Despite all the problems plaguing the company, Peloton is still valued at about $1.9 billion following the post-earnings rout. Peloton generated $2.8 billion in revenue and a net loss of $1.26 billion in fiscal 2023. Fiscal 2024 doesn't look like it's going to be much better. Analysts only expected 4.8% revenue growth for Peloton in fiscal 2024, but those estimates may be pushed down following the company's results.
A decent balance sheet will give Peloton plenty of time to attempt to turn things around, but a successful turnaround looks more unlikely following the fourth-quarter report. In the short term, Peloton stock could do just about anything. In the long run, it looks more likely than not that Peloton stock will continue to disappoint investors.
