Shares of interactive fitness platform Peloton (PTON) soared in February on speculation that the firm could be acquired by other companies that seek to get a foothold in the fitness equipment market. Multiple companies were named as potential suitors, including Amazon (AMZN), Apple (AAPL), or NIKE (NKE). As is often the case with takeover rumors, they don’t materialize. Peloton is unlikely to be acquired and investors may want to sell shares in the company as long as the price is high!
Peloton has more than just one problem
Peloton’s business is fundamentally challenged as the COVID-19 pandemic winds down and the fitness brand has suffered declining sales growth related to its fitness equipment lately. While sales blew up at the beginning of the COVID-19 pandemic as gyms were forced to close their doors, the fitness platform has struggled to generate sales growth in recent quarters. With people going back to work and gyms gradually opening up again, material headwinds for the company are affecting the financial outlook for Peloton.
In the second quarter, Peloton saw a slight upward bounce in revenues to $1.13B, but total revenues still grew only 6% year over year. Connected fitness revenues dropped 8% year over year to $796.4M due to strong year-over-year comparisons and slowing product demand related to equipment price increases. Peloton’s connected fitness revenues include chiefly sales from hardware equipment, like the company’s exercise bikes and treadmills.
Starting at the end of January, Peloton is now also charging delivery and installation fees for its fitness equipment which effectively acts as a price increase. The increase in pricing ranged from $250 for Peloton’s bikes to $350 for the treadmill base model. Peloton raised product prices between 14-17%, which is likely to further slow demand for fitness equipment in the third quarter.
Besides a challenged top line, Peloton is still not profitable, in part due to high operating costs. Year-to-date losses accumulate to a massive $815.3M, about half of which was contributed by the second quarter. Peloton is still losing money hand over fist with its business model and the firm is highly unlikely to post a profit in FY 2023.
FY 2022 guidance disappoints
The guidance for FY 2022 is getting worse and worse for Peloton. In 2021, the fitness company submitted its initial guidance for FY 2022 with expectations of 3.63M connected fitness subscriptions and $5.4B in revenues. In the first quarter, Peloton already refreshed its outlook and submitted a new guidance that called for only 3.35M to 3.45M connected fitness subscriptions by the end of the year and between $4.4B and $4.8B in total revenues (equipment sales and subscriptions). In February, the guidance was lowered again and Peloton guided for just 3.0M connected fitness subscriptions and between $3.7B to $3.8B in total revenues. In FY 2021, Peloton generated revenues from the sale of hardware and subscriptions totaling $4.0B. The latest guidance implies that Peloton for the first time ever is going to see a year-over-year decline in revenues of approximately $200M to $300M.
Structural business changes
In response to declining top line growth and another downgrade in the firm’s FY 2022 guidance, the fitness brand announced an overhaul of its business strategy which includes the use of third-party manufacturers for its hardware. The company is also laying off 2,800 positions globally, which will further help to lower operating expenses. Capital expenditures are set to be reduced. The company’s CEO also stepped down. Whether or not Peloton can restructure its business or not depends on many different factors including how profoundly the pandemic changed the exercise behavior of customers and how product price increases affect Peloton’s future equipment sales. The current business trends are still negative and expose investors to big risks.
A way out of Peloton for investors could be the ongoing speculation about a potential takeover. Peloton has been rumored to be an acquisition target with companies like Amazon, Apple, or NIKE allegedly being interested in the fitness equipment maker. Peloton soared as rumors were already reported, but shares have started to fade off of recent highs as the company itself dismissed the possibility of a sale. There is still an opportunity for investors to sell the rumor-driven spike in Peloton’s valuation.
Risks with Peloton
Peloton’s business is facing material revenue headwinds and the guidance for FY 2022 has been lowered again in February. The brand company is pushing back against unfavorable business trends, but the combination of slowing or negative revenue growth and large losses is concerning. If Peloton doesn’t stop the bleeding in its hardware business, the fitness brand faces a further erosion of its revenue and customer base.
There is still time to sell the bounce. There seems to be nothing material about the takeover rumors and that’s why Peloton’s stock price has started to slide. The brand faces long-term revenue and profitability challenges and the end of the pandemic is only going to accelerate the current business trends. Shares of Peloton will have a very hard time to power higher from here, considering that the company is still losing so much money and reportedly not interested in a takeover. As long as acquisition rumors are present in the market, investors may want to take advantage of them and sell Peloton!