Peloton investors face new reality as bike makers’ costs hurt profits

Peloton investors face new reality as bike makers' costs hurt profits

Jen Van Santvoord rides the Peloton exercise bike at her home on April 07, 2020 in San Anselmo, California.

Ezra Shaw | Getty Images

Investors in the peloton were on the verge of a rude awakening on Thursday.

Many expect manufacturers of connected fitness equipment to report slow sales. Gyms reopened and outdoor runs and vacations began during the summer months. What investors hadn’t anticipated was a 20% reduction in the company’s best-selling product and increased marketing spend.

Growth is slow, and it’s less profitable growth.

About $ 2.9 billion in Peloton’s market cap was closed on Friday, the day after the pricing announcement, and the company reported a larger-than-expected loss in its fiscal fourth quarter.

For much of 2020, the company rode a wave of homebound consumers who were willing to spend thousands of dollars to burn calories when gyms were closed due to the pandemic. Such increased demand led to an improvement in the supply chain, forcing Peloton to spend more money to expedite deliveries. Still, evolution was going more smoothly than I thought. Peloton’s quarterly revenue exceeded $ 1 billion for the first time at the end of the year.

In the fourth quarter of 2019, just two years ago, Peloton had 511,000 connected fitness customers. Now the company claims 2.33 million. These clients pay $ 39 per month to access Peloton’s digital training content.

His stock is also gone for the ride. Peloton was one of the biggest winners on the Nasdaq 100 last year, with shares rising 434% in 2020. But so far this year, its stock price has fallen nearly 30%, closing Friday at $ 104.34, as investors look to a new reality.

Wall Street has mixed opinions on the future of the stock. According to FactSet, the average analyst price target is $ 133.40. It’s well above its 52-week low of $ 68.06 last August, but a good measure below its all-time high of $ 171.09 in January.

However, many may agree that Peloton’s path to profitability is turning.

“If you had told me yesterday that Peloton would be heading towards a 1.3 million connected fitness network for fiscal 2022, I would have said the stock would be up 10%,” the analyst said. from JPMorgan Doug Anmuth in a note to clients. “But the structure of how the peloton does it is different from what was expected. [in the Bike price] Bigger and faster than expected.

Anmuth has a target price of $ 138 on Peloton shares. He still hopes international expansion and future product launches, including a rower rumor, will help fuel growth.

But Peloton expects an adjusted loss before interest, taxes, depreciation and amortization of $ 325 million for fiscal 2022, which has just started. The company does not expect to be profitable again until 2023.

In its most recent quarter ended June 30, the overall gross margin fell to 27%, down from around 48% in the last year’s quarter, as costs associated with treadmill recalls and additional expenses for shipping reduced profits.

“For a year and a half, [Peloton] “There’s really no need to pull any levers,” Wedbush analyst James Hardim said in an interview with CNBC’s “Take Check” Friday. “And now, for them to continue fueling this growth story… they have to play their cards just to survive the current assessment.”

high marketing spend

Peloton is not only reducing the price of its bikes, but it will also significantly increase its marketing spend in the months to come. It faces stiff competition in the connected fitness space.

Peloton has not disclosed how much it plans to spend, but sales and marketing spend in its most recent quarter is up 172% from the previous year.

In a phone interview with CNBC, Peloton chairman William Lynch said the company planned to use a series of paid media ads specifically to market its trade. Cheaper versions of Peloton’s two treadmills will launch in the United States next week, after a month of delay due to a recall.

“We believe this will allow us to grow faster and offset the drop in the price of cycling,” said Lynch.

Peloton previously said it sees an opportunity to reach around 15 million homes worldwide and 20 million units of equipment sold compared to 2.33 million sold so far.

According to BMO Capital Markets analyst Shimon Siegel, Peloton shares have essentially risen, just as the company has already achieved its home and appliance targets. Even so, Peloton is still a long way from doing it. And lowering the price of the bicycle may not be a sufficient catalyst to achieve it, he said.

According to FactSet, Seagull’s lowest price target among Wall Street analysts for Peloton shares is $ 45, which would mean cutting Peloton’s value by more than half from its current trading level.

“Lowering bicycle costs may attract new customers, but that shouldn’t extend their lifespan,” Siegel said. “And if anything, it can be inferred that the lower the initial cost, the lower the unsubscribe barrier.” [or drop the service]”

“If the competition remains high, which we think it will be, we are worried about marketing. [costs] The opposite will see continued development, ”said Siegel.

reach new audiences

Management explained that Peloton was cutting prices – what is its cheapest product – in order to reach as many customers as possible who would otherwise not be able to afford the company’s equipment. The company also said it has built enough manufacturing capacity to be able to afford the price cut in recent months as it gains in production capacity.

When asked by analysts, chief executive John Foley said on a results conference call that Peloton was working on the offensive, not the defensive.

“As we think about the competitive landscape, we seek to democratize access to great fitness, which has always been in our playbook,” he said.

Foley also said Peloton believed his treadmill business would one day grow two to three times that of his bike business. The company does not currently break down revenue from the bicycle versus the treadmill.

Peloton’s growth in the treadmill category has stalled as the company recalled its Tread and Tread + machines due to suspected injuries and the death of a child. The company faces several related lawsuits, and on Friday it revealed that the US Department of Justice and the Department of Homeland Security had summoned the company to get more information on the matter.

As Peloton resumes selling the trade – the cheaper of the two machines – analysts should be able to better understand consumer reaction. (It is not clear when Trade + sales will resume.)

Bank of America moved Fitness Company’s stock from neutral to buy on Friday and raised its price target from $ 3 to $ 138 per share. The Wall Street firm said it was very optimistic about the opportunity for Peloton to increase sales of treadmills in the years to come.

“Peloton has indicated that the commercial leads have been ‘incredibly strong’ and we believe this enthusiasm at launch is not unreasonable,” analyst Justin Post said in a research note. “In six months, we think [subscription] The additions will be more important than the margins for the stock.

—CNBC Michael bloom And Mercedes Crystal contributed to this report.

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