Interactive fitness platform Peloton (NASDAQ:PTON) has become a victim of its own success. Shares of the New York City-based company—best known for its exercise bikes and remote cycling classes—plunged about 35% on Friday after its grim earnings release on Thursday, and ensuing earnings call in which the company said its revenue and margins are shrinking as customers cut spending on the PTON's home-exercise equipment and services, which thrived during the COVID-19 outbreak.
Peloton said it now expects sales of $4.4 billion to $4.8 billion in fiscal 2022, which ends next June, much lower than $5.4 billion sales the company forecast three months ago. In a letter to shareholders, Chief Executive Officer John Foley said:
“We anticipated fiscal 2022 would be a very challenging year to forecast, given unusual year-ago comparisons, demand uncertainty amidst re-opening economies, and widely-reported supply chain constraints and commodity cost pressures.”
Peloton stock closed on Friday at $55.64, after suffering its biggest-ever one day drop. For the year, shares are down more than 60%, after having surged more than 500% in 2020. Given this massive adjustment, it seems tempting to buy this once high-flying growth stock at a significant discount.
However, Peloton’s current bearish spell, in our view, reflects both short- and long-term factors that shouldn’t be ignored by bargain hunters.
In the short-run, PTON may continue to struggle to generate demand for its fitness products and services, a reversal which was expected once people resumed their normal, pre-COVID activities.
Over the long-run, it’s difficult to predict how the company evolves in a market which is becoming saturated with virtual fitness services. One major question: is Peloton just a COVID story? Once the pandemic subsides, how will PTON keep its growth momentum going when people return to gyms?
Return To Normal
Early evidence suggests that people are going back to physical gyms. Shares of Planet Fitness (NYSE:PLNT) rose to a record high during the past week after the gym chain predicted a better-than-anticipated outlook. Membership at Planet Fitness facilities has nearly returned to its pre-pandemic peak, CEO Chris Rondeau told CNBC. He noted:
“Our height was 15.5 [million members]. We’re 97% all the way recaptured back to where we were pre-COVID.”
In addition to traditional gyms, Peloton faces heightened competition from privately-held fitness equipment companies such as Tonal, Hydrow, and Mirror. BMO Capital Markets analyst Simeon Siegel in a note last week said that Peloton’s growth story during the height of the pandemic was remarkable, but that doesn’t mean its trajectory is limitless. His note added:
“Connected fitness is becoming a sector rather than a one company story.”
Due to the current challenging environment, it will be hard to justify buying shares of a company showing current losses, which will take much longer to become profitable. That’s the major reason the majority of analysts have cut their price forecast for Peloton after its latest earnings.
MKM Partners analyst Rohit Kulkarni downgraded the stock to neutral, saying he was “wrong about Peloton’s ability to execute amidst re-opening and competitive headwinds.”
Bottom Line
Peloton has been a great winner during COVID lockdowns due to its innovation in the fitness market. But that growth is faltering as the world returns to near normalcy. In this uncertain demand environment, it’s better to avoid betting on an immediate Peloton rebound.