Is Peloton Attractive after Its Q1 Numbers?

It’s no secret, really. The stock market has fallen out of love with Peloton Interactive (PTON), which provides interactive fitness products in North America and internationally. 

The stock is down over 70% in 2021 after the economy reopened and people went back to work. This is a far cry from the 471% growth that the company experienced in 2020 when its stock price went from $26.55 on March 1, 2020, to $151.72 on December 1, 2020.

After the company announced earnings for the first quarter of Fiscal Year 2022, the stock has taken a turn for the worse. We are bearish on the stock until there is clarity on the way forward. (See Analysts’ Top Stocks on TipRanks)

Why Is the Stock Down?

Peloton announced earnings for the first quarter of Fiscal Year 2022 on November 4, 2021. Markets were expecting a loss per share of $1.15. Instead, the company reported a loss of $1.25 per share. Revenue had grown 6% to $805.2 million compared to the corresponding period last year, but it was too little to offset the loss.

In fact, this was the second consecutive quarter of decreasing revenue for PTON. Compared to the third quarter of Fiscal Year 2021, revenue was down 36%. Investors reacted badly to the more-than-expected loss.

CEO John Foley wrote in a letter to shareholders, “A softer than anticipated start to Q2 and challenged visibility into our near-term operating performance is leading us to recalibrate our fiscal year outlook.” Its revenue guidance for Fiscal Year 2022 is now expected to be $4.4 billion to $4.8 billion.

It doesn’t help that the company has made a U-turn on the amount of capital it needs. Before its Q1 numbers, the company said it didn’t intend to raise money. However, 10 days after its results, PTON announced a major equity offering. In a regulatory filing with the SEC (Securities and Exchange Commission), it said that it planned to sell $1 billion of common stock. Its stock price zoomed over 15% on the news but has since fallen.

Why Did PTON Raise Cash? It’s simple. They were running out of it. At the end of Fiscal Year 2021, it had around $1.6 billion in cash and marketable securities. By the end of its most recent quarter, it had come down to approximately $924 million. The company would have run out of money by the end of the fiscal year. The $1 billion cash infusion should give PTON time to figure out its strategy.

A Changing World

Peloton is an interactive fitness company. It sells bikes and treadmills that cost between $1,495 to $4,295. It also has a subscription service that charges $39 for an All-Access Membership. This membership gives one household complete access to Peloton offerings.

As its website says, “You’ll have unlimited access to a growing library of live streaming and on-demand classes, scenic rides, challenges, and real-time performance tracking. No classes offered by Peloton are off-limits. Create profiles for everyone in your home so they can access our entire library of classes from your Peloton Bike, Tread, and the Peloton App.” 

Consumers loved Peloton products and services during the pandemic. Gyms were closed, and people were bored at home. Peloton sales soared so much during the lockdown that for a brief time, there was a waiting period of 10 weeks for a Peloton bike. The company clocked $1.83 billion in revenue for Fiscal Year 2020. For Fiscal Year 2021, its revenue was $4.02 billion.

Sales dropped when the economy reopened, and people headed outside with a vengeance. So did the stock price.

Is There a Bright Spot? 

People are looking at Peloton as an exercise equipment company. However, the real revenue generator in Peloton’s future is likely to be subscriptions. 

Take a look at Peloton’s numbers for the first quarter of Fiscal Year 2022. Its Connected Fitness subscriptions grew 87% to 2.49 million, and paid Digital subscriptions grew 74% to 887 thousand; total Members grew to over 6.2 million. 

Peloton is now going to where people are likely to spend most of their time: Offices and hotels. The company announced the Peloton Corporate Wellness program on June 22. It said its corporate partners would be able to offer their employees and members “subsidized access to Peloton Digital subscriptions, All Access Memberships, and/or Connected Fitness Products.”

Initial launch partners include Wayfair (W), Samsung, SAP (SAP), Accenture Interactive (ACN), and Sky (in the U.K.). On July 20, the largest health insurer in the U.S., United Healthcare (UNH), also joined this list.

In Fiscal Year 2018, Peloton was known as a stationary cycling company with 85% of its workouts on a Peloton. However, since then, the company has expanded its offering with much help from the entertainment industry.

This was the year when the company raised $550 million in funding, and Foley announced that they would build “a media company akin to Netflix (NFLX).” Celebrity instructors came on board, and the budget for music licensing tripled. 

Today, cycling accounts for 60% of the company’s workouts, while strength workouts are a little below 20%, floor workouts are around 10%, and the remaining balance is made up of yoga, running, and outdoors.

Wall Street’s Take

Turning to Wall Street, Peloton has a Moderate Buy consensus rating, based on 14 Buys, 13 Holds, and two Sells assigned in the past three months. The average Peloton price target of $83.8 implies 90.8% upside potential 

However, what potential investors should keep in mind is that the target price has been downgraded from $129.28 on November 1. Peloton stock was trading at $91.44 then.

Conclusion

Peloton has struggled since its most recent earnings. The flip-flops on capital haven’t helped. Investors should stay away from this stock until the holiday season ends at least before taking a call on it. 

Disclosure: At the time of publication, Hashtag Investing did not have a position in any of the securities mentioned in this article