The Peloton Interactive (NASDAQ:PTON) share price crashed by over 35% last Friday, after releasing its latest earnings report. Given the direction of the stock, I think it’s fair to say investors are less than pleased with the results. The subsequent decline has dragged the company’s 12-month performance down to a disappointing -56% return. But the question is, are investors right to run for the hills? Or is this business now trading at a serious discount?
The Peloton share price versus earnings
I’ve explored Peloton before. But, as a quick reminder, the business designs and manufacturers premium home-sports equipment. When the pandemic forced gyms to close their doors, Peloton saw an enormous boost in sales as many individuals wanted to continue their regular workout routine at home. In fact, that’s why the Peloton share price exploded last year.
Sadly, this impressive growth hasn’t lasted. But it was mainly due to safety concerns rather than gyms re-opening. Earlier this year, the stock suffered a similar decline after the Consumer Product Safety Commission advised Peloton Tread+ machine owners to stop using them immediately. This statement was issued after a rising number of injuries were being reported. And management was eventually forced into a product recall.
Looking at the latest earnings report, the severity from the impact of this mis-step is beginning to become apparent. Revenue over the last three months came in at $805m. That marks the second consecutive quarter of declining sales since the safety concerns were raised. Combining this with higher costs resulted in a $374m loss, versus a $71m profit a year ago. And to top it off, full-year sales guidance has also been cut by $1bn.
Needless to say, that’s not a good sign for any business. So seeing the Peloton share price drop sharply isn’t too surprising to me, especially since its elevated valuation was driven by substantial future growth expectations.
A buying opportunity in disguise?
As frustrating and disappointing as slowing sales can be, there were some positives to be found in this report. While sales have recently been falling, $805m is still around 6% higher than a year ago. And looking back to the firm’s pre-pandemic era, it’s over 250% higher than 2019 levels! What’s more, its digital fitness subscription service continues to be popular, with the number of paying members rising 74% to 887,000.
Management is fully aware of the pickle it’s found itself in. So to keep Peloton a competitive and attractive option for consumers, the price of its equipment has been lowered. Personally, seeing prices fall isn’t a particularly positive sign, since it suggests the group’s pricing power is weakening. However, it does increase the value proposition of its devices in the eyes of consumers, which may help rejuvenate sales. If successful, the Peloton share price could be in for a comeback over the long term.
The bottom line
The brand damage to this business appears to be more extensive than I had initially anticipated. But seeing management admit and then address the situation is encouraging. However, I think it’s too soon to tell whether its new strategy is working. Therefore, I’ll be moving Peloton to my watchlist for now.