Cathie Wood is the founder of Ark Invest, and manages over $85bn in assets. A key aspect of her trading strategy is that “in a world driven by disruption”, she aims to “be on the right side of change.” Three days ago, Ark Next Generation Internet ETF bought into the Peloton (NASDAQ: PTON) share price dip, buying 115,515 shares. This increased its holding to 1.7m shares worth around $170m.
So with Wood backing it enthusiastically, is Peloton a good investment for me?
Peloton share price dip
The company describes itself as a disruptor that “connects the world through fitness”. It sells internet-connected stationary bikes and treadmills that allow subscribers to take part in remote exercise classes. With its flagship Peloton Bike+ retailing at £2,295, or £54 per month for 43 months, it’s definitely a high-end business. However, some monthly gym memberships are comparable in price.Â
The Peloton share price is trading at $100, down from a high of $151 in December 2020. It fell 15% after FY 2021 results were reported last week, possibly due to a larger net loss than analysts were expecting.
To increase sales (and hopefully, profit eventually) Peloton is reducing the price of its cheapest bike by $400 to $1,495. However, it expects the lower profit margin will hurt short-term profitability. And Q1 2022 revenue is expected to be only $800m, which is $200m under the consensus forecast.
On the plus side, 250,000 subscribers were added in Q4 2021, bringing its subscriber total to 2.3m. However, the company only expects 140,000 new subscribers in Q1 2022.
Serious challenges
The company is facing some major challenges with average monthly workouts per subscriber falling to a low of 19.9 between April and June this year. Meanwhile, Gym Group reported today that membership has jumped by a third since February. Clearly, as society reopens, consumers globally are now able to visit gyms again, and I think this could hurt Peloton’s sales and subscriber numbers.
Also a big problem is that the company has been subpoenaed by the US Department of Justice after a child was killed and 72 people reported injuries caused by its machines. Worryingly, the company stated that “we are unable to predict the eventual scope, duration or outcome of the investigations”. And in May, it was forced to recall 125,000 of its Tread+ treadmills, and is facing multiple lawsuits from delaying the recall.
Peloton is also being investigated by the US Consumer Product Safety Commission. It’s told Peloton treadmill owners that they pose “serious risks to children for abrasions, fractures, and death”.
Cathie Wood’s investment
It’s obvious that investing in the Peloton share price dip is a complex judgement call. But Cathie Wood seems to have faith in its future and has a track record of backing her convictions. In 2018, Wood predicted that Tesla‘s share price would increase 1,100% to $4,000. She was widely ridiculed for the prediction and the stock nosedived 29% over the next year. But after accounting for stock splits, Tesla hit this prediction in January this year. So, when Tesla slumped in February, she bought more of the stock.Â
So can Peloton be ‘another Tesla’? It saw revenue of $4bn for FY 2021, which was double FY 2020’s revenue, and an increase of 824% compared to FY 2018. Wood could be right about its future prospects, like she was with Tesla. But with the Peloton share price down 33% over the past year, I’m staying away.