Peloton Stock: Is It a Good Buy?
The COVID-19 pandemic led to the emergence of a handful of retail memes that qualify for the collective time capsule. We will remember the brawls over toilet paper. We learned that paper towels are among the top household items we rely on as much as toilet paper. On a lighter note, we turned our bedrooms and living rooms into gyms.
Although fitness equipment is widely available these days, the high-end stationary bikes produced by Peloton became the face of at-home fitness during the pandemic. Not surprisingly, Peloton’s stock price followed suit — moving from $29 per share at its initial public offering in late September 2019 to more than $100 per share about a year into the pandemic. The company also posted a profit for the first time.
For a while, Peloton stock looked like a growth story with plenty of life left — but as its most recent earnings report shows, there are multiple layers of complexity at play.
Peloton’s Controversies During a Year of Growth
Although Peloton’s product offerings were in high demand for the first nine months of the pandemic, the company has found itself steeped in struggle.
Demand and Supply Problems
Throughout the pandemic, retailers — including Peloton — have faced supply chain issues that have slowed delivery and aggravated customers. In Peloton’s case, where the price point starts at around $2,000 and goes up to more than $4,000, customers have not taken the delays lightly. Angry buyers have taken to social media sites like Facebook, Reddit and Twitter to voice their complaints and elevate concerns over shipping delays.
The supply chain issues prompted Peloton to ship its bikes overseas by air for a while, which it said increased its transport costs tenfold.
A Product Recall During a Period of Surging Business
Just over a year into the pandemic, Peloton faced concerns about its Tread+ and Tread treadmills.
On April 17, the U.S. Consumer Product Safety Commission issued a warning about the safety of these products and asked consumers to stop using them. The commission linked the treadmills to several dozen incidents of children and pets being pulled under the machines and suggested that adult users may be at risk as well if they lose their balance.
Peloton initially chose to argue against the safety warnings. The company later reversed course by issuing a product recall. It also rolled out an auto-locking feature via a software update and announced that it will offer a full refund on the $4,000-plus machines for any consumers who request one by November 2022 and a partial refund to those who contact the company after that point.
In the few months prior to the safety concerns over its treadmills, Peloton had quietly dealt with another serious concern: customer privacy. A security research firm found that Peloton’s application programming interface allowed anyone to discover a user’s age, gender, geographic location, weight, workout history and, in some cases, date of birth.
The firm reported the leak to Peloton on Jan. 20, 2021, and requested a fix within 90 days. Although the company restricted access to users, it remained silent on the issue until after the deadline had lapsed and reporters followed up. At that point, Peloton confirmed that the fix had been made and acknowledged its unresponsiveness, vowing prompt responses moving forward.
3 Shareholder Class-Action Lawsuits
On April 29, 2021, the Rosen Law Firm filed a shareholder class-action lawsuit asserting that Peloton’s shares dropped in value by more than 14% after the company decided to keep selling its treadmills despite the noted safety concerns. Almost a month later, on May 24, 2021, a second shareholder class-action lawsuit surfaced, highlighting concerns that Peloton’s stock suffered another 14% drop after the company reversed course and opted for a product recall. And on Dec. 2, 2021, Pomerantz LLP issued a press release announcing it had filed a class-action lawsuit alleging that Peloton had “falsely and repeatedly assured investors that Peloton’s recent success was not primarily due to COVID-related increased demand” and that the company’s growth and financial results were sustainable.
Peloton ended its 2021 fiscal year on a positive note, with a 54% increase in total revenue to $937 billion vs. the $915 billion it had predicted. While 54% is a respectable boost by any measure — especially when driven by astounding growth of 114% and 176%, respectively, in Connected Fitness Subscriptions and paid Digital Subscriptions — it fell well short of the triple-digit growth Peloton reported in 2020.
In its first-quarter guidance for fiscal year 2022, Peloton predicted $800 million in total revenue — a figure it beat by five million, reporting $805.2 million total revenue, a 6% increase compared to Q1 2021. However, that fell short of analysts’ estimates of $810.7 billion, according to CNBC.
Growth was also solid for Connected Fitness Subscriptions and paid Digital Subscriptions, which grew by 87% and 74%, respectively, according to the earnings release. Losses, on the other hand, were steeper than expected — $1.25 per share vs. the $1.07 analysts had predicted — as was the 17% fall-off in exercise equipment sales. The churn level, which measures the number of subscribers who end their subscriptions, remained low at 0.82% and was slightly lower than the company had predicted in previous guidance but was slightly up from Q4 2021.
Shares plummeted 24% after the earnings release, CNBC reported.
“The overall consumer environment has been very challenging to predict coming out of COVID,” the earnings report noted. As a result, Peloton downgraded prior guidance for Q2 and made it less specific by introducing ranges rather than specific figures. The estimate “reintroduction” reflected slowing demand as Americans return to their more normal routines. The company said it would adjust operating costs “to better align investments with the new growth expectations,” CNBC reported.
Although revenue grew 6% in the second quarter compared to the same quarter last year, Peloton posted a net loss of $439.4 million, or $1.39 per diluted share. Chief Financial Officer Jill Woodworth again tempered expectations, downgrading guidance for full-year 2022 revenue from a range of $4.4 billion to $4.8 billion to a range of $3.7 billion to $3.8 billion, according to a transcript of the Feb. 8 earnings call.
Peloton’s Connected Fitness segment, which CNBC reported brings in about 70% of the company’s total revenue, also posted disappointing results. The company’s guidance had predicted that Peloton would finish the second quarter with 2.8 million to 2.85 million subscribers. However, subscriptions as of quarter’s end totaled 2.77 million. As a result, Connected Fitness guidance for the full year has also been downgraded, in this case from a range of 3.35 million to 3.45 million to approximately 3 million subscribers.
An Increasingly Competitive Climate
In part due to the COVID-19 pandemic, at-home gym equipment surged in popularity in 2020. Although Peloton appears to have captured more consumer mindshare than its competitors, there are several worthy opponents in the space — and many are giving Peloton a run for its money in terms of both pricing and features.
Bowflex makes the VeloCore bike, which leans into your movements (something a Peloton won’t do). The company sells a connected membership with workouts, coaching and on-demand classes.
NordicTrack’s S22i cycle adjusts for inclines and declines, and instructors can adjust the bike virtually during a digital class. NordicTrack’s Silent Magnetic Resistance System makes for a quiet ride, and you can test drive the company’s connected iFit membership free of charge for a year.
Other noteworthy competitors are the compact, easy-to-move Echelon EX-5s, the amenities-rich MYX and the compact, highly adjustable Keiser M3i.
Good To Know
According to a 2019 survey of Peloton subscribers, 4 out of 5 weren’t looking into home fitness equipment prior to purchasing one of Peloton’s products. That makes for a very large potential customer base that could emerge suddenly — much like what happened during the pandemic.
Restructuring and Layoffs
CEO John Foley started the second-quarter earnings call with an announcement that the company is about to undertake a restructuring that will streamline teams and reporting structures and create clear lines of accountability for financial results. As part of that restructuring, Foley will step down as CEO. Barry McCarthy will take over in that role, and Foley will serve as executive chair of the board. The shake-up extends to the board — the board president is stepping back into a full-time member role, another director is leaving and two new directors have been appointed.
Peloton employees also find themselves in the crosshairs. About 2,800 jobs, representing approximately 20% of the corporate workforce, are being cut. Foley announced the layoffs in a note to team members on Feb. 8, before the earnings call.
“As we look to execute on the next phase of our company’s transformation, we are
clear-eyed that it will not occur overnight and that our progress may not be linear.
However, we are confident the changes we are making will lead to improved and more consistent operating performance,” Foley wrote in a letter to shareholders.
Should You Bet on Peloton’s Future?
Peloton has faced a number of speed bumps in the past year, and the company is nowhere near out of the woods. It has something to prove in terms of stateside manufacturing prowess, quality control and customer service. Yet the company knew, long before the pandemic struck, that there was a market for upscale, connected fitness equipment at home. It also built a business model with a dual revenue stream: equipment sales and digital memberships.
Green Light, Red Light or Yellow Light?
Is Peloton a buy, sell or hold? According to Yahoo Finance, Peloton is currently teetering between “buy” and “hold.” Of 31 analysts tracking the company, 15 rate it a “buy” or “strong buy.” Fourteen rate it a “hold,” and two rate it “underperform.” None of the analysts rated the stock a “sell.” Although Peloton must still navigate declining demand, increased inflation, supply chain issues, chip shortages and a restructuring that has gotten off to a rocky start, the company believes it has what it takes to return to profitability, which could help it get its share price back on track.
Daria Uhlig contributed to the reporting for this article.
Data is accurate as of Feb. 14, 2022, and subject to change.
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- Peloton. 2022. "Q2 2022 Shareholder Letter."
- Peloton. 2022. "Q1 2022 Shareholder Letter."
- CNBC. 2022. "Peloton posts loss, slashes its full-year revenue outlook as founder steps down from CEO post."
- The Motley Fool. 2022. "Peloton Interactive (PTON) Q2 2022 Earnings Call Transcript."
- Pomerantz LLP. 2021. "Pomerantz Law Firm Announces the Filing of a Class Action Against Peloton Interactive, Inc. and Certain Officers - PTON."
- CNN Business. 2022. "Peloton is replacing its CEO and cutting 2,800 jobs."
- Peloton. 2022. "A Message from John Foley, Peloton's Co-Founder, Executive Chair."