Insights

Peloton Stock: Some Workouts Don’t Work Out

The market is punishing stocks that come through with “beat and raise” results this earnings season. So you can probably imagine how a textbook “miss and lower” quarterly report will go over. Shares of Peloton Interactive (NASDAQ: PTON) plummeted on Tuesday morning after posting a rough financial update. 
Revenue tumbled 27% to hit $964.3 million for Peloton’s fiscal third quarter, ending in March, as a 55% year-over-year increase in subscription revenue was no match for a 42% plunge in the larger hardware category.
A positive result of this scenario would normally be that the top-line gains were coming from the historically high-margin part of its business, but this silver lining is actually fool’s gold. Operating expenses have more than doubled over the past year, and even though one-time restructuring and goodwill impairment charges account for the lion’s share of that increase, it’s still not an encouraging sight when the top line is going the other way. Peloton’s net loss ballooned to $757.1 million, or $2.27 a share. Analysts were holding out for a deficit of just $0.83 a share on $973 million in revenue. 
It’s a bad look on both ends of the income statement, but don’t stop pedaling. It gets worse.  
Image source: Peloton.

Working up a sweat
As bad as the fiscal third quarter was (and we’ll get back to that shortly), the company’s outlook for the current three-month period is worse. Peloton expects to generate $675 million to $700 million in revenue in the fiscal fourth quarter, which ends next month. We’re talking about a 27% year-over-year decline and a 29% sequential decline. Analysts were bracing for a seasonal sequential dip in revenue, but Peloton will land well below the $821.7 million that Wall Street pros were targeting.
Peloton aged about a decade last year. It had a rough 2021 that started with a treadmill recall and growing concerns about how the company would fare as the rollout of viable COVID-19 vaccines would send workout seekers back to fitness centers, gyms, and spinning classes. A character on a popular TV show would be killed off following a Peloton session. Sales growth would decelerate sharply as 2021 played out, and the same head-turning market darling of a growth stock that saw its stock soar fivefold in 2020 would go on to give back nearly all of those gains by the end of last year.
Peloton stock has gone on to shed more than two-thirds of its value in 2022. The departure in February of co-founder and CEO John Foley initially triggered buyout speculation, but sometimes art imitates strife — folks are buying Peloton gear, while folks aren’t buying Peloton itself.
We find ourselves with an eyesore of a unicorn. Peloton is that rare company that’s trying to fix supply chain issues while at the same time dealing with bloated inventory levels. If you’re hungry for another paradox, pull up a plate. The backpedaling maker of stationary bikes believes that last month’s price cut in hardware will increase monthly sales, but it somehow believes that a pricing increase that will kick in next month for its All Access subscription plan won’t impact churn. 
If you’re fishing for good news, one positive is that Peloton’s audience is getting larger. It has 2.962 million connected fitness subscribers, 7% more than it had in December and 42% higher than its base last March. Unfortunately it’s only modeling for roughly 20,000 net additions for the current quarter, a 1% sequential uptick. Another positive is that it’s tackling its costs, and it expects to achieve $450 million in savings in the new fiscal year that starts this summer. 
Keeping its outflows in check is crucial, as even new CEO Barry McCarthy concedes that the company is “thinly capitalized” at this point. With interest rates rising and its share price plummeting, any kind of capital raise to lengthen its lifeline will be painful. You can credit Peloton for trying, but eventually all credit needs to be paid.
Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Peloton Interactive. The Motley Fool has a disclosure policy. –

The market is punishing stocks that come through with “beat and raise” results this earnings season. So you can probably imagine how a textbook “miss and lower” quarterly report will go over. Shares of Peloton Interactive (NASDAQ: PTON) plummeted on Tuesday morning after posting a rough financial update. 

Revenue tumbled 27% to hit $964.3 million for Peloton’s fiscal third quarter, ending in March, as a 55% year-over-year increase in subscription revenue was no match for a 42% plunge in the larger hardware category.

A positive result of this scenario would normally be that the top-line gains were coming from the historically high-margin part of its business, but this silver lining is actually fool’s gold. Operating expenses have more than doubled over the past year, and even though one-time restructuring and goodwill impairment charges account for the lion’s share of that increase, it’s still not an encouraging sight when the top line is going the other way. Peloton’s net loss ballooned to $757.1 million, or $2.27 a share. Analysts were holding out for a deficit of just $0.83 a share on $973 million in revenue. 

It’s a bad look on both ends of the income statement, but don’t stop pedaling. It gets worse.  

Image source: Peloton.

Working up a sweat

As bad as the fiscal third quarter was (and we’ll get back to that shortly), the company’s outlook for the current three-month period is worse. Peloton expects to generate $675 million to $700 million in revenue in the fiscal fourth quarter, which ends next month. We’re talking about a 27% year-over-year decline and a 29% sequential decline. Analysts were bracing for a seasonal sequential dip in revenue, but Peloton will land well below the $821.7 million that Wall Street pros were targeting.

Peloton aged about a decade last year. It had a rough 2021 that started with a treadmill recall and growing concerns about how the company would fare as the rollout of viable COVID-19 vaccines would send workout seekers back to fitness centers, gyms, and spinning classes. A character on a popular TV show would be killed off following a Peloton session. Sales growth would decelerate sharply as 2021 played out, and the same head-turning market darling of a growth stock that saw its stock soar fivefold in 2020 would go on to give back nearly all of those gains by the end of last year.

Peloton stock has gone on to shed more than two-thirds of its value in 2022. The departure in February of co-founder and CEO John Foley initially triggered buyout speculation, but sometimes art imitates strife — folks are buying Peloton gear, while folks aren’t buying Peloton itself.

We find ourselves with an eyesore of a unicorn. Peloton is that rare company that’s trying to fix supply chain issues while at the same time dealing with bloated inventory levels. If you’re hungry for another paradox, pull up a plate. The backpedaling maker of stationary bikes believes that last month’s price cut in hardware will increase monthly sales, but it somehow believes that a pricing increase that will kick in next month for its All Access subscription plan won’t impact churn. 

If you’re fishing for good news, one positive is that Peloton’s audience is getting larger. It has 2.962 million connected fitness subscribers, 7% more than it had in December and 42% higher than its base last March. Unfortunately it’s only modeling for roughly 20,000 net additions for the current quarter, a 1% sequential uptick. Another positive is that it’s tackling its costs, and it expects to achieve $450 million in savings in the new fiscal year that starts this summer. 

Keeping its outflows in check is crucial, as even new CEO Barry McCarthy concedes that the company is “thinly capitalized” at this point. With interest rates rising and its share price plummeting, any kind of capital raise to lengthen its lifeline will be painful. You can credit Peloton for trying, but eventually all credit needs to be paid.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Peloton Interactive. The Motley Fool has a disclosure policy.

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