What's Next for Peloton After a Rocky, Record-Setting Year

    • Peloton has beaten earnings estimates every quarter of 2021 so far.
    • However, product issues and a crowded market pose new threats.

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Peloton expects to close out its fiscal 2021 with $4 billion in revenue on the year — up from $1.83 billion in 2020 and $915 million in 2019. Pretty good trajectory, right?

The connected fitness company has been a market darling for much of the COVID-19 pandemic as it rides the momentum of a shifting work-from-home lifestyle in the U.S.

Now, the company is once again looking to outperform in the market as its share price remains high and revenue continues to trend in a positive direction.

The only issue? Peloton might be deboarding the growth train.   

COVID-19 and The Great Repositioning

To properly set the table, let’s take a look at year-end figures for Peloton’s fiscal 2020:

  • Peloton had $1.8 billion in cash at the close of the year ended June 30, 2020.
  • Q4 of 2020 was, at the time, the largest quarter ever for the company, bringing in $607.1 million in revenue.
  • Connected fitness subscriptions reached 1.09 million at a 199% year-over-year growth rate.
  • The number of quarterly workouts grew at a 4x rate to ~77 million workouts with the average monthly workouts per subscriber increasing 2x to 24.7.

The company did so well that during Q3 and Q4 of 2020 they dealt with backlogged orders and had to defer some of their Q4 revenues to 2021 while realizing Q3 revenues in Q4.

Peloton was also able to achieve some ridiculous profit margins. Margin expansion isn’t sexy the way “our subscriber base grew almost 200%” is, but growing at these outlandish rates while not only maintaining but IMPROVING profitability by 280 bps (2.8%) was impressive.

In 2020, Peloton checked the box for a high-growth company with margins inching closer to that of a software-as-a-service company than one making regular consumer durables.

The tale of 2021 appears relatively similar. Peloton has beaten earnings estimates every quarter this year so far and grown its revenues at a rate faster than it did in 2020.

But it’s rare that this type of ride lasts forever.

The Bears Have A Case

Peloton’s brand is its most important asset. Brand is why Peloton is considered a high-end luxury product. Brand is why Peloton can command prices previously inconceivable for at-home fitness equipment.

What happens when that brand is tarnished?

In May, Peloton recalled all of its Tread and Tread+ treadmills in the aftermath of several injuries and the death of a child.

In June, cybersecurity company McAfee said that hackers can gain direct access to the cameras and microphones of Peloton bikes. The hackers can add fake apps that look like Netflix and Spotify and steal your login information straight from your Peloton.

Peloton has, for the most part, been able to rise beyond these blemishes on its record, but certain numbers show that such incidents definitely come with a cost.

  • The voluntary treadmill recall in Q3 will set the company back ~$170 million.
  • The company’s accounts payable increased almost 6x year-over-year to $444 million. Why? The increase in inventories associated with backlogged orders and — you guessed it — faulty treadmills.
  • Remember when I touted Peloton’s ability to grow while maintaining strong margins? Let’s forget about that. In Q3, the company’s profit margin decreased from 46.9% to 35.2%. Yikes.

Stockpiling inventories and an order backlog are acceptable when you have a strong brand to lean on, but margin erosion could become a serious problem for Peloton if inventories keep growing and brand affinity further erodes. 

But Wait! There’s More!

You didn’t think we’d get out of here without talking about meme stocks, did you?

Peloton stock currently has $2.08 billion of short interest, which represents 8.68% of the total float. Essentially, there is currently ~$2 billion in the market betting on Peloton to fail. Is that a lot? Short answer: yes. Peloton has the largest short position in the domestic consumer durables market.

Hearing that might make some Redditors want to YOLO their 401k’s into connected fitness long buys, but I’m skeptical.

Peloton bears have recently been able to cover their short positions, which appeared a tall task earlier in the year when the company was deep in its growth narrative. 

The crowded marketplace is a factor, too.

  • Companies across the fitness spectrum are raising money at incredibly high valuations.
  • Tonal, CLMBR, Tempo, LiteBoxer, and many others have all capitalized on the same fitness-starved COVID-19 market that Peloton was able to exploit.
  • Others such as Icon and Echelon have become increasingly litigious in their attempts to unseat the current fitness king.

Faulty hardware, corruptible software, supply chain difficulties, and myriad intellectual property issues are all reasons to question how much higher Peloton can go from here.

What Now? 

Peloton is still trading above its 50-, 100-, and 200-day moving averages while price targets for Q4 2021 earnings are tracking ahead of schedule. The company should easily post more than $4 billion in revenues this year.

The share price and expected earnings are not an unassailable defense. Margin compression — particularly for a company with the growth trajectory of Peloton — is nothing to trivialize. Any significant damage to the Peloton brand could topple the entire house. 

Plus, the connected fitness market will never be a winner takes all market. It’s too fragmented and exercise modalities are too diverse for a “one ring to rule them all” scenario … but Peloton was pretty freaking close. During the height of the pandemic, its name was synonymous with at-home fitness.

But when the brand is threatened, customers are flocking back to brick-and-mortar gyms, and a cohort of competitors enters the market on what feels like a daily basis, Peloton’s bright future is no longer a promise.