Peloton buyers are dealing with a brand new actuality as bicycle producers’ prices damage earnings

Jen Van Santvoord rides her Peloton exercise bike home on April 7, 2020 in San Anselmo, California.

Ezra Shaw | Getty Images

Peloton investors expected a rude awakening on Thursday.

Many expected the connected fitness equipment maker to report a decline in sales. Gyms reopened, and outdoor runs and vacations were popular in the summer months. What investors weren’t expecting was a 20% drop in the price of the company’s best-selling product and an increase in marketing spend.

The growth is slowing down and it is less profitable.

About $ 2.9 billion of Peloton’s market cap was cut off on Friday, the day after the price announcement, and the company reported an unexpectedly large loss in the fourth quarter of fiscal year.

For most of 2020, the company rode a wave of home-based consumers willing to spend thousands of dollars burning calories when gyms closed due to the pandemic. Such increased demand resulted in a snafus in the supply chain, forcing Peloton to spend more money to expedite deliveries. Nonetheless, the growth came about a lot easier than anyone could have imagined. Peloton’s quarterly revenue rose to more than $ 1 billion for the first time at the end of the year.

Two years ago, Peloton had 511,000 affiliated fitness subscribers. Now the company has 2.33 million. These are people who are spending $ 39 a month to access Peloton’s digital workout content in addition to owning one of the company’s home fitness equipment.

The supply went with me too. Peloton was one of the biggest winners on the Nasdaq 100 last year, with stocks rising 434% in 2020. But this year the stock has fallen nearly 30% so far, closing at $ 104.34 on Friday as investors stare at a new reality.

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

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

“If you had told me yesterday that Peloton would hit 1.3 million net networked fitness additions in fiscal 2022, I would have said the stock would rise 10%,” JP Morgan analyst Doug Anmuth said in a press release to customers. “But the composition of how Peloton gets there is different than expected. The reduction [in the Bike price] is bigger and earlier than expected. “

Anmuth has a target price of $ 138 on Peloton stock. He continues to anticipate international expansion and future product launches, including a purported rowing machine, will fuel growth.

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

In the final quarter that ended June 30, total gross margin fell from nearly 48% in the year-ago quarter to 27% as the costs associated with a treadmill recall and additional shipping costs weighed on profits.

“In the last year and a half [Peloton] Didn’t really have to pull levers, “Wedbush analyst James Hardiman said in an interview with CNBC’s Tech Check on Friday.” And now they have to play so they can continue this growth story. “Their cards are just right, so that current rating sticks. “

Higher marketing spend

Not only is Peloton lowering the price of its bike, it will also significantly increase marketing spending in the coming months. It faces tougher competition in the connected fitness space from Hydrow, Tonal, and Mirror, which are owned by Lululemon.

Peloton hasn’t revealed exactly how much it plans to spend, but sales and marketing expenses rose 172% year over year in the most recent quarter.

In a phone interview with CNBC, Peloton President William Lynch said the company plans to use a series of paid media advertisements to specifically draw attention to its tread. The cheaper version of Peloton’s two treadmill machines will hit the US market next week after a month-long delay due to a recall.

“We believe it will allow us to grow faster and it will counter the drop in bike prices,” said Lynch.

Peloton previously stated that it sees opportunities to reach around 15 million households worldwide and sell 20 million devices, compared to 2.33 million it has sold to date.

According to Simeon Siegel, an analyst for BMO Capital Markets, Peloton’s stock has essentially risen as if the company had already met those budget and equipment goals. Peloton is still a long way from that. And lowering the price of bicycles might not be enough of a catalyst to get it there, he said.

Siegel has the lowest price target among Wall Street analysts for Peloton stocks at $ 45, according to FactSet. That would mean Peloton’s value is more than half its current retail value.

“Lowering the cost of the bike can attract new customers, but it shouldn’t extend its lifespan,” said Siegel. “And if anything, one can hypothesize that the lower the acquisition costs, the lower the migration barrier [or drop the service]. “

“If the competition stays high, which we think will be, we will take care of the marketing [costs] will continue to grow and not the other way around, “added Siegel.

Reach a new audience

Management said that Peloton is cutting prices on the cheapest product in order to reach more customers who might otherwise not be able to afford the company’s devices. The company also said that it has built enough manufacturing capacity in recent months to afford the price cut as it achieves greater production efficiency.

When asked by analysts, Chief Executive John Foley commented on a conference call on the results that Peloton is on the offensive – not the defensive.

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

Foley also said that Peloton believes that one day their treadmill business will be two to three times the size of their bicycle business today. The company does not currently break any revenue from bikes versus treadmills.

Peloton’s growth in the treadmill category was halted after the company recalled its Tread and Tread + machines due to reported injuries and the death of a child. In particular, the company is facing several related lawsuits. It was revealed on Friday that the US Department of Justice and the Department of Homeland Security had summoned Peloton for more information on the matter.

With Peloton resuming sales of the Tread – the cheaper of the two machines – analysts should be able to gain more insight into consumer reaction. (It’s unclear when Tread + sales will resume.)

Bank of America upgraded the fitness company’s stock on Friday to buy from neutral and raised its price target by $ 3 to $ 138 per share. The Wall Street company said it would be most optimistic if Peloton had an opportunity to grow its treadmill sales in the years to come.

“Peloton indicated that Tread’s leads were ‘incredibly strong’ and we trust that enthusiasm at the launch is not unfounded,” said analyst Justin Post in a research note. “We think in six months [subscription] Adds will be more important to the stock than margins. “

– CNBC’s Michael Bloom and Crystal Mercedes contributed to this report.