Peloton (NASDAQ: PTON) shareholders were filled with anticipation as 2021 began. The launch of its new treadmills (Peloton Tread), was fuelling excitement following the phenomenal success of its exercise bike. Unfortunately, this positivity turned to tragedy as reports of the death of a child and more than 72 injuries led to the recall of Peloton treadmills in the US and UK this week.
But Q3 results out on May 6 surpassed expectations with sales rising 141%. So, is this now a buying opportunity for Peloton shares?
Well, Cathie Wood’s ARK Invest seems to think so, it’s been buying the dip for months now. Topping up its ARKW exchange-traded fund (ETF) with an additional 140,904 PTON shares on Wednesday and 289,535 shares on Thursday.
Peloton Bike+ – press.onepeloton.co.uk
Peloton shares crash over 50%
After a truly sensational share price run in 2020, Peloton reached a market cap of $50 billion in January. Today it stands at $24 billion. The Peloton share price has fallen further in recent days and is down over 50% since its January high.
While many are shouting ‘buy the dip’, a $25 billion market cap could still be considered extreme for a company that makes exercise equipment.
Peloton $PTON Market Cap
January: $50 billion Today: $25 billion
For context, shedding $25 billion in market cap is equivalent to losing a DraftKings, Slack, or Lyft.
— Joe Pompliano (@JoePompliano) May 6, 2021
Peloton $PTON Market Cap falls from $50bn to $25bn
But Peloton bulls will argue that Peloton is so much more than an equipment manufacturer. This tech sensation, markets and sells a lifestyle and has so far achieved that exceptionally well.
There’s no doubt the pandemic had a considerable hand to play in its share price acceleration. With gyms shuttered and people stuck at home, Peloton became a much-coveted product by consumers everywhere. And for some families, its high price point stood easily justified with the argument that multiple people get the benefit for less than a monthly gym membership. Throughout 2020, the Peloton share price rose a staggering 391%.
Peloton Tread causes death and multiple injuries
Sadly, the tragic death of a 6-year-old child was first disclosed by CEO John Foley in mid-March. This was blamed on the Tread+ and the US Consumer Product Safety Commission (CPSC) issued a press release on April 17 advising consumers to ‘Stop Using the Peloton Tread+’. But it took Peloton another two weeks before they issued a recall. Backlash and mounting pressure led the CEO to issue a statement apologizing for the delay.
Statement from Peloton’s CEO John Foley:
“The decision to recall both products was the right thing to do for Peloton’s Members and their families. I want to be clear, Peloton made a mistake in our initial response to the Consumer Product Safety Commission’s request that we recall the Tread+. We should have engaged more productively with them from the outset. For that, I apologize.”
Peloton Tread+ has been recalled for safety reasons – press.onepeloton.co.uk
The CPSC concluded the Tread and Tread+ could cause injury or death to adults, children and pets if they get pulled underneath. Meanwhile, display consoles can also fall off and cause injury such as bruising, broken bones, cuts or grazes.
Statement of Robert S. Adler, Acting Chairman of the CPSC:
“I am pleased that the U.S. Consumer Product Safety Commission and Peloton have come to an agreement to protect users of the Peloton Tread+ and Tread products. The agreement, which the Commission voted this morning to accept, requires Peloton to immediately stop selling and distributing both the Tread+ and Tread products in the United States and refund the full purchase price to consumers who wish to return their treadmills.”
This is a difficult situation to navigate and could make or break the brand. Parents and pet owners will be reluctant to bring a Peloton into the house if it could lead to injury. And that surely includes a massive proportion of customers.
Announcing the recall and apologizing immediately before a great earnings report can also be construed in a cynical light. Get the bad news over with and replace it with fantastic sales figures. But as investors know, past returns can never guarantee future returns and the impact of the treadmill recall may be of bigger concern than shareholders realise.
An expensive problem
The company has stated that the recalling of 125,000 treadmills will cost it $165 million. This is $50 million in recall costs, followed by an estimated $105 million in future revenue sales and $10 million in 3-month subscription fee waivers.
To continue to be the leader in at-home Connected Fitness, Peloton has acknowledged it will have to continue to ensure safety measures.
Peloton CEO John Foley:
“We want to provide a safe, world-class fitness experience for our members, people who want the convenience and value of being able to work out from home… As the largest home Connected Fitness brand in the world, we want to be leaders in safety.”
An outstanding quarter
Peloton makes its money from the sale of the physical equipment, followed by fitness subscriptions and accessories. It also offers financing to consumers to help them afford the product over an extended period. And it now boasts nearly 900,000 digital subscribers.
While the convenience of exercising at home understandably appeals to many. It’s the engaging content from world-class fitness instructors that unites the Peloton community and creates an unrivalled level of fitness addiction. Proof of this working successfully came in Q3, which saw a 47% surge in workout participation. Connected Fitness subscriptions saw 26 monthly workouts versus 17.7 year-over-year.
Peloton App – press.onepeloton.co.uk
The company is keenly expanding on this by building out immersive fitness programs with guidance to help users achieve specific fitness goals with weekly progress reports.
Q3 total revenue came in at $1.26 billion, a 141% year-over-year growth. This was the result of a surge in orders.
$PTON bulls vs bears
Peloton is ultimately doing good for humanity in encouraging gamified fitness as an alternative to traditional gaming or streaming. If it can tighten its safety issues, continue to attract new consumers and retain existing customers, then there’s good reason to have a bullish outlook on PTON stock.
The bearish argument comes from three angles, a rise in competition, Covid-19 reopening and the current financial environment.
There is a noticeable rise in competitive products to rival the Peloton. The Echelon, Zwift, and Nordic Track, all offer something similar. Then there’s Ergatta for rowing, or the Omni One omni-directional treadmill for gaming.
As gyms and fitness centres reopen, and consumers are allowed back out to socialise again, will the appeal of exercising at home wear off? For existing Peloton users it may not, as the convenience of working out without a commute and at times that suit may well continue. But whether it will continue to attract new buyers at the same rate as last year is doubtful.
Aside from this, 2020 was an unprecedented year in a number of ways. And in the investing world, it saw retail investing take on a mind of its own.
This led tech stocks to be pumped to insane valuations and many growth stocks reach unsustainable price points. With its $25 billion market cap, Peloton may well be a victim of its own success. How its share price fares from here is up for strong debate. In any case, it’s an interesting stock to watch.