The Peloton Interactive (NASDAQ:PTON) share price dropped by 13% last week after the home-fitness equipment maker announced a product recall. The US stock is still up by around 90% over the past 12 months. But is this an opportunity to add the company to my portfolio at a discount?
What’s going on with the Peloton share price?
2020 proved to be a stellar year of growth for Peloton Interactive. With the pandemic closing the doors of gyms, many individuals turned to its home equipment products to stay in shape. As a result, its level of sales shot up by triple-digit rates while its losses narrowed. Yet even though the Peloton share price has been sliding since the start of the year, its most recent earnings report showed revenue increasing by 140% from $524.6m to $1.26bn year-on-year.
Given that company appears to be performing exceptionally well, what caused the sudden drop last week? Earlier in April, the Consumer Product Safety Commission (CPSC) issued a statement. It advised owners of Peloton’s Tread+ machines to stop using them at once following growing reports of injuries and the tragic death of a child. After some deliberation, the management team announced last week that it is executing a major product recall of over 125,000 machines.
Injuries related to treadmills are not an uncommon occurrence and are certainly not unique to Peloton. In fact, according to the latest statistics published by CPSC, in 2014 around 24,400 emergency room visits occurred due to injuries sustained by treadmill machines. Regardless, this incident has undoubtedly tarnished the firm’s reputation in the eyes of many consumers. And the impact of this recall on its revenue for April to June is expected to be around $165m. So seeing the Peloton share price cut by double-digits last week wasn’t too surprising to me.
Moving forward
The Peloton share price has been on a steady slide since the start of 2021. There appears to be growing uncertainty about whether the company can maintain its level of growth in a post-pandemic world. This uncertainty is only more prominent now after last week’s announcement.
However, while gyms may be reopening, one investing guru doesn’t appear to be concerned. Cathie Wood’s ARK Next Generation Internet exchange-traded fund just bought an additional $11.7m worth of Peloton stock. This brings her total investment to around $124m.
The bottom line
Before recent events, Peloton has been widely popular among its customers, some of whom have become addicted to the experience. The connected home-fitness market is relatively new. But given the cult-like following the company has managed to achieve, I don’t think the reopening of gyms is going to pose as big a threat as some might expect.
Having said that, the management team has a long road ahead to repairing the damage to its brand. As it stands, it is unknown as to how many customers intend to seek a full refund. And I think it’s also possible for a product liability lawsuit to occur in the future. But taking a step back, these are ultimately short-term problems for the business. I think Cathie Wood’s decision to invest more is sound. Therefore, I would consider adding this stock to my growth portfolio, despite the short-term volatility that likely lies ahead.
