ii view: Peloton shares pedal backwards

Online group fitness workouts have grown in popularity, but so has competition. We assess prospects. 

Fourth-quarter results to 30 June 2021  

• Revenue up 54% to $937 million 
• Net loss of $313 million, down from a profit of $89 million
• Loss of $1.05 per share, down from earnings of $0.31

Guidance: 

• Expects first-quarter revenue of $800 million
• Expects full year 2022 revenue of $5.4 billion, up from $4 billion over 2021

ii round-up:

Connected tread mill and cycle machine maker Peloton Interactive (NASDAQ:PTON) posted disappointing fourth-quarter results as the cost of a recent product recall hit hard. 

A loss per share of $1.05 was greater than analyst expectations of nearer to $0.50 per share, with the fitness company also cautioning over the earnings outlook due to a one-fifth cut in the price of its interactive cycling machine. 

Peloton shares fell by around 6% in after-hours US trading, having risen by over 350% since pandemic induced market lows back in March 2020. 

The ability to join online fitness groups during Covid lockdowns proved highly popular. But sales were hit earlier this year when Peloton 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. 

Peloton generates revenues via both product sales and subscriptions to its online sessions from both Peloton machine owners and non-product owners.

Peloton product owners or connected fitness subscribers rose by 114% from a year earlier to 2.33 million. Digital subscriptions or non-Peloton machine owners gained by 176% to over 874,000. Net monthly connected fitness churn came in at 0.73%. That’s up from 0.52% a year ago. The lower the figure the better. 

Looking ahead, management anticipates having 2.47 million connected fitness subscriptions by the end of the current first quarter. Expected first-quarter revenue of $800 million was below analyst hopes for closer to $1 billion, although it does factor in the reduction in the price of its original cycle machine. 

Management also highlighted inventory accounting issues. However, it will not result in the restatement of any of its past results. Q1 results are likely to be released in early November. 

ii view:

New York headquartered Peloton generates almost 90% of its sales in the USA. Canada accounts for just over half of the balance, with the rest of the world making up what's left. Revenue is split approximately 80:20 between product sales and subscription revenues. 

For investors, ongoing growth in both product and subscription sales underlines the brands established reputation. Markets overseas still offer significant growth potential, and the company continues to invest in its future with its first US-based manufacturing facility now being built to compliment its existing Taiwan operations. 

But confidence in the company arguably remains on the backfoot. Product safety issues and recalls have now been added to with inventory accounting problems. Growing competition has likely added to its product price cuts, and raw material prices are rising, putting pressure on margins. In all, and with consumers potentially returning to physical gyms following the end of lockdowns, investors might prefer to sit and watch Peloton for now.   

Positives: 

• Pandemic winner
• Potential to grow overseas

Negatives:

• Growing competition
• Not paying a dividend

The average rating of stock market analysts:

Strong hold