Shares in Peloton Interactive (NASDAQ: PTON), the maker of top-shelf exercise bikes, have taken a massive hit today. As I write this, the PTON share price is hovering around the $57 mark, which is 33% lower than yesterday’s closing price. Over the last year, the stock has fallen around 55%.
So, why have Peloton shares taken such a big hit today? And has this share price fall created a buying opportunity for me?
Why Peloton’s share price just fell 33%
The reason the PTON share price has tanked is that last night, the company – which was a real winner last year during lockdown – posted a disappointing earnings report for the three months ended 30 September (Q1 of its fiscal FY2022 year).
There were a number of ‘nasties’ in the Q1 earnings report. One was the net loss of $376m for the quarter. Last year in Q1, Peloton posted net income of $69m. Operating expenses, which were up 140% year on year to $622m, were partly to blame for the large loss.
Another issue was cash flow, or lack of it. For the period, the group generated negative cash flow from operating activities of $561m. Last year in Q1, cash flow from operating activities was positive $312m.
A third issue was subscriber growth. This was the lowest since the company went public a few years ago.
What really spooked the market, however, was forward guidance, which was cut significantly. On the back of lower demand for its exercise products, the group reduced its full-year sales guidance by $1bn to a range of $4.4bn to $4.8bn.
“It is clear that we underestimated the reopening impact on our company and the overall industry,” commented CFO Jill Woodworth.
It’s worth pointing out that there were some positives in the Q1 report. For example, revenue was up 6% year on year to $805m. This represents a 250% increase on Q1 2020 revenue. The company was also optimistic about the long-term growth story. “We remain convinced that the growth opportunity for Peloton is substantial,” wrote management.
However, overall, the report was pretty ugly.
Should I buy Peloton stock now?
As for whether the share price fall has created a buying opportunity for me, I’m not convinced the stock has a favourable risk/reward profile at present.
One concern I have in relation to Peloton is competition. Not only is it facing competition from other exercise equipment manufacturers such as Tonal, Hydrow, Mirror, and Zwift but it’s also facing competition from gyms and boutique exercise studios now that the world has reopened.
It’s worth noting here that Peloton has been lowering its prices recently in order to remain competitive. That’s not good, in my view. Great companies generally don’t need to do this. The fact that it’s lowering its prices suggests to me that it doesn’t have a strong competitive advantage.
Another issue for me is the lack of profits. This year the company expects to generate adjusted EBITDA of -$425m to -$475m. The fact that the company is not profitable makes it a higher-risk investment.
Finally, there’s the valuation. Even after today’s share price fall, the company has a market capitalisation of close to $30bn. That strikes me as high for a company that makes exercise equipment that the average person can’t afford.
Given these issues, I won’t be buying Peloton shares. I think there are better growth stocks I could buy today.
