Peloton investors face a new reality as fitness company’s costs eat into profits

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

Peloton investors were in for a rude awakening on Thursday.

Many expected to see the connected fitness equipment maker report slowing sales. Gyms have reopened, and outdoor runs and vacations beckoned during the summer months. What investors hadn’t anticipated was a 20% price cut in the company’s top-selling product and a ramp up in marketing spending.

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

Roughly $2.9 billion of Peloton’s market capitalization was lopped off on Friday, the day after the pricing announcement was made and the company reported a wider-than-expected loss in its fiscal fourth quarter.

For most of 2020, the company rode a wave of homebound consumers willing to spend thousands of dollars to burn calories when gyms were shuttered due to the pandemic. Such heightened demand resulted in supply chain snafus, forcing Peloton to shell out more money to speed deliveries. Nonetheless, growth was coming much easier than it could have imagined. Peloton’s quarterly revenue ballooned to more than $1 billion for the first time, as the year came to a close.

Just two years ago, Peloton counted 511,000 connected fitness subscribers. Now, the company boasts 2.33 million. These are people who shell out $39 per month to access Peloton’s digital workout content, in addition to owning one of the company’s at-home fitness machines.

Its stock has gone along for the ride, too. Peloton was one of the biggest gainers on the Nasdaq 100 last year, with shares rallying 434% in 2020. But so far this year, its share price has tumbled nearly 30%, closing Friday at $104.34, as investors stare down a new reality.

Wall Street has mixed opinions on where the stock might go next. According to FactSet, analysts’ average price target is $133.40. That’s solidly above its 52-week low of $68.06 last August. But a good measure below its all-time high of $171.09 in January.

What many can agree on, though, is that Peloton’s path to profitability is changing.

“If you had told me yesterday that Peloton would guide to 1.3 million connected fitness net adds for fiscal 2022, I would’ve said the stock would be up 10%,” J.P. Morgan analyst Doug Anmuth said in a note to clients. “But the composition of how Peloton is getting there is different than expected. The reduction [in the Bike price] is bigger and sooner than we expected.”

Anmuth holds a price target of $138 on Peloton shares. He still expects international expansion and future product launches, including a rumored rowing machine, will help to fuel growth.

But Peloton is forecasting an adjusted loss of $325 million, before interest, taxes, depreciation and amortization, in fiscal 2022, which just started. The company doesn’t expect to be profitable again until 2023.

In its latest quarter ended June 30, total gross margins fell to 27%, from nearly 48% in the year-ago quarter, as costs associated with a treadmill recall and extra expenses for shipping ate into profits.

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