Every January, companies that focus on health and fitness see a big surge in business. Collective guilt from over-indulging during the holidays has people running for gyms, signing up for diet plans, and ordering home fitness equipment. Peloton Interactive, Inc. (NASDAQ:PTON) should be reaping the rewards of the January fitness rush. Will the company be impressing investors when it delivers second quarter earnings on Feb. 8? Don’t count on it. In fact, I expect the misery for PTON stock is going to continue.
Even after a brief rally when Peloton shares bounced back from the company’s latest public relations (PR) disaster, PTON stock is still sitting where it was before the pandemic started. It is up only 3.7% from when shares first started publicly trading in 2019.
PTON stock posted spectacular growth — just over 500% — in the first year of the pandemic. However, those were extraordinary circumstances. After the heady days of 2020, PTON stock now earns an “F” in my Portfolio Grader, which is a clear indicator to stay away. Here is a recap of why I recommend avoiding investing in Peloton, despite its steeply discounted price.
The Pandemic Boost Was Temporary
The single biggest argument against a Peloton investment is that the 2020 performance of PTON stock is not repeatable. The first year of the pandemic was a unique set of circumstances. With gyms closed and many people stuck in lockdowns, there was a surge in demand for home fitness equipment. As we began a period of cautious re-opening, Peloton sales plummeted.
Look at the growth seen in the company’s first quarter (Q1) for fiscal 2021 (reported in November 2020). Revenue grew 232% year-over-year (YOY). Connected bike subscriptions grew 137% YOY. Digital subscriptions grew 382%. After a loss of $1.29 per share the year earlier, Peloton’s earnings per share of 20 cents nearly doubled analyst expectations.
Contrast that to last November when Peloton reported its Q1 for fiscal 2022. Revenue grew just 6% YOY. Connect subscriptions grew 87%. Digital subscriptions were up 74%. The company reported a loss of $1.25 per share.
PTON stock dropped 25% on the news. If not for subscription revenue — which slowed, but still posted big gains — the company would have seen revenue drop as the demand for its hardware cratered. The problem there is that Peloton faces stiff competition for those digital subscription dollars.
How bad are Peloton’s hardware sales at this point? PTON stock tanked in January after a company leaker posted information claiming Peloton would halt production of its bikes and treadmills for months as a result of crashing demand. The company’s chief executive officer disputed a widespread manufacturing shutdown, but did confirm the company is “right-sizing” its production and “resetting [its] production levels for sustainable growth.” Those statements don’t exactly inspire confidence about growth in this company’s future.
The Apple Factor
A few weeks back, I wrote about yet another reason to avoid PTON stock: Apple (NASDAQ:AAPL). Peloton’s hardware sales have been sliding, but digital subscription revenue (no Peloton bike required) is on the rise. At this point, it is safe to say that subscription revenue is critical to Peloton’s business.
Unfortunately, Apple is making it more difficult and more expensive to attract potential customers thanks to privacy changes in iOS. Peloton and other companies are taking a hit because they can’t target fitness-minded iPhone owners. Considering that most smartphones sold in the U.S. these days are iPhones, that is a problem. Worse, Apple continues in its own push for increased Services revenue, and that means its own Fitness+ app is front and center.
The Apple story actually gets even more interesting. In recent weeks there have been rumors about the possibility of Apple buying Peloton. Such a move would help it to push Apple Fitness+ subscriptions. Would Apple ever want to get into the home fitness equipment market? That is doubtful, but if it did, a Peloton bike would save development costs and bring in an existing user base.
Let’s not overlook the negative PR that Peloton has suffered. Headlines about children being killed by Peloton treadmills and TV characters suffering heart attacks while using a Peloton bike are not good for business. Two weeks ago, the company was in damage control mode when another popular TV show featured a character suffering a Peloton-related heart attack — although at least this time, it wasn’t fatal.
These negative headlines turn off potential buyers, undermine market confidence in the company, and hurt PTON stock.
The Bottom Line on PTON Stock
If you didn’t start on a new health and fitness routine in January, it is not too late. You can make a February fitness resolution and still have plenty of time before it is beach season. That resolution may even involve buying a new Peloton bike. The company would definitely appreciate that.
However, as tempting as PTON stock might be at its pre-pandemic price, there is just too much risk involved. Staying afloat is going to be a big enough challenge for this company, let alone staging a meaningful recovery. I don’t currently see Peloton as a long-term growth investment. What happens with Peloton over the next year might make for fascinating watching, but this stock has no place in a growth portfolio.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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