ii view: Peloton shares freewheel lower, fast

With a pandemic push now winding down, Peloton wants to exploit long-term health and fitness trends. Buy, sell, or hold? 

Fourth-quarter results to 30 June 2021  

• Revenue up 6% year-over-year to $805.2 million 
• Net loss of $376 million, down from a profit of $69 million
• Loss of $1.25 per share, down from earnings of $0.20 per share

Guidance: 

• Expects second-quarter revenue of $1.1 billion to $1.2 billion
• Expects full-year 2022 revenue of between $4.4 billion to $4.8 billion, down from $5.4 billion

ii round-up:

Connected tread mill and cycle machine maker Peloton Interactive (NASDAQ:PTON) cut its full-year sales outlook as consumers returned to the gym following prior pandemic closures and supply chain issues impacted.

Peloton shares fell by more than 20% in after-hours US trading as the New York headquartered company slashed its expected sales for the year ending June 2022 from $5.4 billion (£3.94 billion) to as little as $4.4 billion (£3.2 billion). It blamed a tough first-quarter comparable and  soft start to the second quarter. 

First-quarter revenue growth of 6% to the end of September to $805.2 million (£588 million) contrasted with a jump of 250% seen in the year ago pandemic influenced initial quarter of 2020. A loss of $1.25 per share fell below analysts’ expectations nearer to $1. 

Shares of US gym operator Planet Fitness (NYSE:PLNT) are up by close to 20% year-to-date in comparison to a fall of over 40% for Peloton shares. 

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Peloton generates revenues via both product sales and subscriptions to its online sessions from both Peloton machine owners and non-product owners. Earlier this year, the company was forced to recall a treadmill product due to safety issues. Other makers, including a Lululemon (NASDAQ:LULU) subsidiary, have also stepped-up the marketing of their products. 

Gross margins during the quarter were impacted by a price reduction in its original exercise bike product, increased supply chain and logistics expenses and an addition to its tread mill recall reserves.

Connected fitness subscriptions of 2.49 million are up from 2.33 million in the prior quarter with total members of 6.2 million up from a fourth quarter 5.9 million. 

ii view:

Peloton generates over 80% of its sales in the US, with Canada accounting for a further 10% and the rest of the world making up the balance. Revenue is split roughly 80:20 between product sales and subscription revenues. 

For investors, management confidence in long-term growth prospects, despite a clear boost from the pandemic, offers reassurance. A focus on cost reduction is now being made and markets overseas still offer significant growth potential. Peloton continues to invest in its future with its first US based manufacturing facility now being built to complement its existing Taiwan operations, while the long-term trend towards healthier lifestyles offers a positive backdrop. 

That said, confidence in the company remains bruised, with little in this latest quarter to help. Previous inventory accounting problems and product safety issues, plus recalls sit alongside supply chain issues now being suffered by many corporations. Growing competition has also added to its prior product price cuts. In all, and with the pandemic mudding the waters and few signs yet of an upturn in fortune, investing at this much lower level is for high-risk investors only. Others may wish to sit this one out until positive business momentum is established. 

Positives: 

• Pandemic winner
• Potential to grow overseas

Negatives:

• Growing competition
• Not paying a dividend

The average rating of stock market analysts:

Strong hold