Peloton (PTON) Riding Sharply Lower As Discouraging Earnings Report Highlights Numerous Challenges
5:21 pm Monday, August 30th, 2021
Peloton (NASDAQ:PTON), a high-flying stay-at-home stock during the pandemic, is riding sharply lower after reporting poor 4Q21 results that suggest the COVID-related tailwinds are fading. Making matters worse, price reductions on its original Bike, recalls for the Tread due to safety issues, and rising freight costs cut deeply into product margins. As a result, PTON missed badly on the bottom line, posting a loss per share of $(1.05) vs. the $(0.32) consensus estimate. Adding salt to the wound, the company disclosed this morning that the Department of Justice (DOJ) and Department of Homeland Security (DHS) have subpoenaed the company for documents related to its reporting of injuries.
Demand for PTON’s connected fitness equipment didn’t completely fall off a cliff, but it did significantly decelerate. In fact, the 54% revenue increase is the lowest growth rate that PTON has registered as a publicly traded company. The story really comes to light, though, when drilling down on PTON’s key operating metrics.
For instance, while Paid Digital Subscriptions jumped by 176% yr/yr to 874,000, this number is down from Q3’s total of 891,000. Similarly, Average Net Monthly Connected Fitness Churn expanded to 0.73% from 0.31% last quarter.
Not only is PTON losing more subscribers, but its active customers are also using its equipment less. This is reflected in Average Monthly Workouts per Connected Fitness Subscription falling to 19.9 from 26.0 last quarter. What the combination of these metrics indicates is that the return to some social normalcies and the reopening of fitness centers are damaging PTON’s business.
Simultaneously, the Tread and Tread+ recalls that resulted from the fatality of a child and numerous other injuries may have had a more severe impact on results than anticipated. During PTON’s Q3 earnings conference call, the company estimated that Q4 product gross margin would slide to ~21% from 28.4% in Q3. However, the actual number came in at a paltry 11.6% due to recall-related costs, Bike price cuts, and higher supply chain and logistics costs.
