On Thursday, Peloton investors got a nasty awakening. Many anticipated to hear that sales of connected exercise equipment were declining. During the summer months, gyms have reopened, and outdoor runs and holidays have beckoned. What investors didn’t expect was a 20% price decrease in the company’s best-selling product, as well as an increase in marketing investment.
Growth is slowing, and it is becoming less profitable. On Friday, the day after the pricing announcement, Peloton’s market value was slashed by $2.9 billion, and the firm disclosed a larger-than-expected loss in its fiscal fourth quarter. When gyms were closed due to the pandemic, the company surfed a wave of homebound consumers prepared to pay hundreds of dollars to burn calories.
Due to the increased demand, supply chain issues arose, causing Peloton to spend additional money to expedite deliveries. Nonetheless, growth was coming far more quickly than anyone had anticipated. As the year came to a conclusion, Peloton’s quarterly revenue surpassed $1 billion for the first time.
Peloton had 511,000 linked exercise subscribers just two years ago. The corporation now employs 2.33 million people. These are folks who pay $39 a month to get access to Peloton’s digital training content and possess one of the company’s at-home fitness equipment. Its stock has also been riding shotgun. Peloton was one of the Nasdaq 100’s greatest gainers last year, with shares up 434 percent in 2020. However, its stock price has dropped about 30% this year, closing Friday at $104.34, as investors face a new reality.
Wall Street is split on where the stock should go next. Analysts’ average price objective is $133.40, according to FactSet. That’s up from its 52-week low of $68.06 set in August. However, it is still much below its all-time high of $171.09 set in January. Many people believe, though, that Peloton’s route to profitability is shifting.
In a letter to clients, J.P. Morgan analyst Doug Anmuth wrote, “If you had told me yesterday that Peloton would guide to 1.3 million connected fitness net adds for fiscal 2022, I would have guessed the stock would be up 10%.” “However, the content of Peloton’s journey is different than predicted. The price drop [for the bike] is larger and more rapid than we anticipated.”
Peloton shares have a price objective of $138, according to Anmuth. He is optimistic about foreign expansion and future product launches, including a suspected rowing machine. Peloton, on the other hand, expects a loss of $325 million in fiscal 2022, before interest, taxes, depreciation, and amortization. It won’t be profitable again until 2023, according to the business.
Total gross margins plummeted to 27 percent in the most recent quarter, down from nearly 48 percent the year before, as expenditures linked with a treadmill recall and additional shipping fees ate into revenues.
Higher marketing spending
Peloton is not only cutting the price of its Bike, but it is also ramping up its marketing budget in the coming months.
In the linked fitness area, it faces greater competition from the likes of Hydrow, Tonal, and the Lululemon-owned Mirror. Peloton hasn’t said how much it wants to spend, but sales and marketing spending increased 172 percent year over year in the most recent quarter.
Peloton President William Lynch said in a phone interview with CNBC that the firm wants to utilize a variety of paid media campaigns to build awareness about their Tread in particular. After a months-long delay owing to a recall, the less priced version of Peloton’s two treadmill machines will be available in the United States next week.
“We believe it will let us to develop more quickly, and it will be in opposition to the Bike price drop,” Lynch said. Peloton has claimed that it sees an opportunity to reach around 15 million households worldwide and sell 20 million units of equipment, up from the 2.33 million it has sold to date.
Peloton’s stock has risen as if the firm has already met its household and equipment targets, according to BMO Capital Markets analyst Simeon Siegel. Peloton, on the other hand, is still a long way from doing so. And, he added, decreasing the Bike’s price might not be enough of a motivator to get it there.
According to FactSet, Siegel has the lowest price objective for Peloton shares among Wall Street analysts, at $45.
Peloton’s value would be reduced by more than half compared to where it is presently trading. “Lowering the Bike’s price may attract more users, but it shouldn’t lengthen their lives,” Siegel added. “And, if anything, the lower the initial cost, the lower the barrier to churn [or discontinuation of service].”