It’s amazing to consider what has changed since the onset of the COVID-19 pandemic four years ago. During the lockdown, Peloton Interactive (NASDAQ:PTON) was suddenly thrust into the headlines and favored by speculative stock traders.
Today, the U.S. pandemic lockdowns have largely been lifted, and the public’s eagerness to buy pricey home-exercise bikes has waned. Meanwhile, PTON stock is far below its late-2020 peak price of over $150.
Yet, let’s not confuse a steep share-price decline with real value. Today, overeager traders may have learned a lesson the hard way: sometimes a stock is down not because it’s a bargain, but because it never should have gone up in the first place.
Tragedy and the “important precipice”
In 2020 and 2021, interest rates were low and people were glad to spend their pandemic-era stimulus money on exercise equipment they didn’t need — and on stocks with moonshot potential. However, 2022 was a year of reckoning in which interest rates soared and high-flying stocks came crashing down.
PTON stock is indeed a textbook example of 2022’s painful winding-down of easy-money policy and speculative fervor in the financial markets. To a certain extent, this macroeconomic shift accounts for the pop-and-drop share-price action.
However, Peloton Interactive had its own, company-specific issues as well. Tragically, one child was badly injured and another was killed due to mishaps involving Peloton products. In the wake of over 70 reported incidents, the company commenced a recall of one of its most popular treadmill models.
It’s easy to say this in hindsight, but Peloton’s red flags were too big to ignore. BMO Capital Markets analysts warned at that time that the company was teetering “at the edge of an important precipice” and that a “material strategic reset” was “likely required to stem meaningful cash-burn and faltering demand.”
Fast-forward to September 2022, and Peloton Interactive’s two co-founders and chief commercial officer stepped down from their positions. A few months later, the company announced a program to sell used/refurbished exercise bikes; these bikes were still quite pricey (over $1,000 each) and in any case, PTON stock continued to rapidly lose value.
Was the C-suite exodus a sign of deeper, ongoing issues at Peloton? As the company released its second-quarter fiscal-2024 results and Peloton stock hovers near its all-time lows, it looks like leaving may have been the right move to make.
Failing to “ignite growth”
“We continue to explore ways to ignite growth across multiple vectors,” Peloton Interactive CEO Barry McCarthy declared in the company’s letter to the shareholders. He added, “Several of these new initiatives have performed strongly. Some have not.”
The “some have not” remark may be the understatement of the year. Two years of declining revenue underscore Peloton’s failure to get the public enthused about high-priced home-exercise equipment in a post-pandemic world.
Turning to the numbers, Peloton Interactive generated $743.6 million in Q2 FY2024 revenue, representing an appreciable decline from the year-earlier quarter’s $793 million. This happened even though Peloton’s management claimed to observe “exceptionally strong sales growth through these channels this holiday season, with year-over-year unit growth of 74% in the second quarter.”
The outlook isn’t particularly bright as Peloton Interactive guided for revenue of $700 million to $725 million for the current quarter. Again, this would represent declining sales; Peloton reported $749 million in revenue in the year-earlier quarter. Moreover, Wall Street’s consensus estimate called for $749 million in revenue for the current quarter.
Peloton blamed “uncertainty surrounding our ability to efficiently grow Paid App subscribers and the performance of other new initiatives,” also pointing to an “uncertain macroeconomic outlook.”
Furthermore, McCarthy cautioned, “We now expect the business to generate positive free cash flow in Q4 but to fall short of achieving our goal for the full year.”
An exercise in futility
That’s certainly not what the market wanted to hear from Peloton’s management. PTON stock was down nearly 23% in midday trading on Thursday, perhaps as an expression of investors’ dashed hopes that the company would stage a spectacular turnaround in 2024.
As the old stock-market saying goes, hope is not a strategy. Peloton really needed to knock it out of the park last quarter and follow it up with optimism for the current quarter. Evidently, strong holiday-season sales weren’t enough to assuage the market’s worst fears about Peloton.
Thus, in light of this, I’m exercising my right to stay as far away from Peloton Interactive stock as possible.