In what may be a classic rags-to-riches-to-rags tale, exercise bike manufacturer Peloton Interactive (NASDAQ:PTON) was practically a lifesaver for quarantined consumers who wanted to maintain their physical well-being during the worst of the COVID-19 crisis. However, with the social and economic backdrop pivoting away from the premium home exercise market, investors need to face reality. I am bearish on PTON stock.
Poor Earnings Hurt PTON Stock
One of the most-anticipated earnings disclosures, investors sought clues regarding the forward viability of the consumer economy based on Peloton’s latest financial print. Unfortunately, the overall numbers for the exercise equipment specialist’s fiscal fourth quarter greatly disappointed analysts, sending PTON stock plummeting.
According to TipRanks reporter Shrilekha Pethe, during fiscal Q4, Peloton’s revenue declined by 5% on a year-over-year basis, landing at $642.1 million. In fairness, this figure exceeded Wall Street’s consensus target calling for $641.01 million.
However, on the bottom line, while Peloton’s loss of 68 cents per share compared very favorably to a loss of $3.72 in the year-ago quarter, it failed to meet analysts’ consensus estimate of a loss of 40 cents. Contributing to the red ink was a membership drop of 5% year-over-year to 6.5 million members (from 6.9 million).
Adding to the woes, management admitted that the product recall announced in May of this year “substantially exceeded our initial expectations.” This negative surprise led to the accrual of additional costs of $40 million, Pethe mentioned. Even worse, approximately 15,000 to 20,000 impacted members “elected to pause their monthly subscriptions in Q4 pending the receipt of a replacement seat post.”
Still, what really cratered PTON stock was a poor outlook for Q1. Now, management expects revenue to land between $580 million and $600 million, representing a 4% year-over-year decline. In contrast, analysts anticipated that Q1 sales would hit $647 million.
Of course, some market contrarians might view PTON stock as a speculative discounted opportunity. Nevertheless, going through with such an idea would clash with what the smart money is anticipating.
Rumblings in the Options Chain Warrant Caution for Peloton
In just one day, PTON stock shed almost 23% of its value. Despite the carnage, circumstances could still worsen from here, warranting an extremely cautious framework for Peloton.
Specifically, rumblings in the derivatives market suggest that the smart money may have been caught off guard by the negativity that ultimately materialized in PTON stock. Looking at TipRanks’ options chain for PTON contracts that are set to expire on August 25, a red flag centers on the total open interest between calls and puts.
To get everyone on the same page, open interest represents the number of outstanding options contracts. Further, it’s a running tally that decreases when the position is closed out.
In this case, the net change in open interest for PTON calls (from strike prices $3 to $8) came out to 3,544 contracts, while the net change for PTON puts (for the same strike price range) landed at 20,206 contracts. That’s a 5.7x differential, implying a strong reaction to the earnings report. Also, it’s not out of the question that many traders anticipated Peloton to deliver a positive earnings surprise.
For one thing, the company did beat analysts’ sales target, which is not an insignificant achievement in the current environment. Second, rising demand for out-of-money (OTM) call options prior to the earnings report suggests a contrarian outlook.
For example, the PTON August 25 $7.50 calls saw significant volume and open interest increases in the second half of August. However, following the Q4 disclosure, the price of the options dropped precipitously and some traders closed out of their positions.
Fundamentals Don’t Favor the Home Exercise Market
Primarily, a key reason to be skeptical about PTON stock centers on personal motivation. For decades, consumer reports indicate that home exercise equipment buyers end up using their machines far less than previously planned. COVID-19 may have changed certain behaviors, but it’s unlikely to have impacted the home exercise market, given PTON’s poor performance.
Second, American households are in trouble. With credit card debt exceeding the $1 trillion mark, consumers need to be extra prudent about their expenditures. Such a backdrop sadly does little to instill confidence in PTON stock.
Is Peloton Stock a Buy, According to Analysts?
Turning to Wall Street, PTON stock has a Moderate Buy consensus rating based on five Buys, 10 Holds, and one Sell rating. The average PTON price target is $7.80, implying 41.4% upside potential.
PTON Stock Had Its Fun, but Now It’s Time to Run
While Peloton may have been a sterling enterprise during the COVID-19 pandemic, this cynical tailwind has long faded. The company’s latest earnings report and disappointing forecast underscores the pressure consumers find themselves under. Until this narrative decisively pivots favorably, it’s time to steer clear of PTON stock.