It’s painful owning Peloton right now, this portfolio manager says

The almost inevitable pullback on exercise equipment and streaming company Peloton (Peloton Stock Quote, Charts, News, Analysts, Financials NASDAQ:PTON) has arrived as the market recently tore a hole in the stock after the company’s latest earnings report. The grim news was a reduction in management’s outlook considering the return-to-work and more importantly to the gym in these hopefully latter days of the COVID-19 pandemic. 

And with the stock now down by more than half since September, investors may be wondering if now’s the time to buy PTON on the cheap. The answer to that question depends on whether you think Peloton has the stuff to survive and thrive in a post-pandemic environment, meaning one in which selling its in-home products will be competing against in-person fitness classes, gyms and so on. And on that topic, the jury seems to be out, says Shane Obata of Middlefield Capital, who sold his Peloton stock on a loss. 

“Peloton was something that we got interested into partially because the consumers love it. People who use Peloton really like it but [because of] some of the problems that were facing the company recently, we basically went through the ideal situation for Peloton — and I hate saying ‘ideal’ in regards to the pandemic — but effectively everyone [was] inside, using Peloton instead of going to the gym,” said Obata, speaking on BNN Bloomberg on Wednesday.

“So, thematically it’s very against what we’re seeing in the market now with people getting back outside, going to the gym, traveling and all those things. And so it’s pretty difficult. We’re not particularly optimistic in the very near term here,” he said.

“We do think customers really like this and so we’ll continue to watch it but it’s been painful. We don’t currently own it — we owned it previously and sold it after after enduring some losses. It’s something that we’ll revisit later but it’s a difficult story right now,” Obata said.

Already in a long funk since its shares peaked at about $160 in January, Peloton sank like a stone after its fiscal first quarter 2022 financials were released on November 4. The stock was hanging around $90 per share before the report and quickly dropped to now about $49. The company missed analysts’ forecasts on the top and bottom line while management’s outlook was gloomier than originally advertised, calling for full fiscal 2022 sales of between $4.4 and $4.8 billion compared to guidance after the previous quarter which had called for $5.4 billion. (All figures in US dollars.)

“We anticipated fiscal 2022 would be a very challenging year to forecast, given unusual year-ago comparisons, demand uncertainty amidst re-opening economies, and widely-reported supply chain constraints and commodity cost pressures,” CEO John Foley said in a letter to shareholders.

Peloton posted a net loss of $376 million or $1.25 per share for the quarter ended September 30 on revenue of $805.2 million, which was up six per cent from the year earlier topline of $810.7 million. Analysts had been calling for a loss of $1.25 per share and $810.7 million in revenue.

And in a snapshot of the changing environment this year versus last year, the company said its fiscal Q1 connected fitness subscription workouts grew 55 per cent year-over-year to 120.5 million but the average workouts per subscription per month went from 20.7 a year ago to now 16.6 per month, suggesting that users are finding other ways to occupy their time as economies open up further.

Looking at the quarter and the market’s reaction, Bank of America analyst Justin Post said the selloff may be overdone, even as he slashed his target price from $138 to $112 while maintaining his “Buy” rating for PTON.

“While estimate cuts are a negative, we still expect 1.1 million sub adds in FY22 (+47 per cent year-over-year) despite reopening impact, and there is potential upside from new products,” Post wrote in a report last week.

“We expect some added supply chain disruption in 1H’22 to adjust to lower demand levels. While there still is estimate uncertainty, we do not see miss as evidence of share losses, and think reopening impact is unlikely to repeat in FY23,” Post said.

Other analysts have downgraded their ratings, with Truist Securities going from “Buy” to “Hold” on the stock and dropping its target price from $130 to $68 per share. Telsey Advisory has gone from “Outperform” to “Market Perform” while lower its target from $135 to $70 per share.

Further commenting on the quarter, Foley said, “While we are reducing our near-term forecast, our confidence in and commitment to our strategy is unchanged. Software and streaming media have redefined at-home fitness and are driving a migration of workouts into the home, a consumer behavioural shift that we believe is still in its early stages. This trend was well-underway prior to the pandemic, and has clearly been accelerated by the growing awareness and adoption of Connected Fitness over the past year and a half.”