Why Has Peloton Stock Fallen More than 6% Today?

Shares of fitness-tech company Peloton Interactive (PTON) are trading 6.5% lower in early market trading at the time of this writing. The company announced its results for the first quarter of fiscal 2020 today. Peloton reported sales of $228 million and an EPS of -$1.29.

Analysts expected Peloton’s sales to be $196.86 million with an EPS of -$0.4 for the first quarter. While the company easily beat the top line, it missed the earnings forecast by a huge margin. In the December quarter, the company expected sales between $410 million and $420 million. The expectation was significantly higher than analysts’ estimates of $384.26 million. In fiscal 2020, Peloton expects sales between $1.45 billion and $1.5 billion, which is above analysts’ consensus estimates of $1.35 billion.

Despite strong revenue guidance, investors aren’t impressed with the company’s declining profit margins, which sent the stock lower today. In the first quarter, Peloton managed to reduce its net loss by $4.8 million to -$49.8 million. The company also increased the adjusted EBITDA margin by 283 basis points to -9.2%.

What drove Peloton’s sales?

In the September quarter, Peloton’s connected fitness subscribers grew 103% to 562,774, which brought its total member base to 1.6 million. One of the key metrics for the company is the customer churn and retention rate. Peloton’s churn rate was 0.9%, while the 12-month retention rate is 94%.

Customer engagement was also higher in the first quarter. The average monthly workouts per connected fitness subscriber rose to 11.7—up from 8.9 in the same period the previous year.

In the shareholder letter, the company said, “We benefited from continued strong demand for our connected fitness experience, attributable to our effective brand and performance marketing and growing word-of-mouth referrals from our loyal Members.”

The company plans to focus on scaling operations by growing its international presence. Peloton also wants to enhance customers’ experience, which will lead to higher retention rates going forward.

What next for Peloton and investors?

Peloton went public on September 26. The company issued 40 million shares at $29 per share to raise $1.26 billion including $100 million in private placement. Currently, the stock is trading at $23.36, which is 19.5% below its IPO price.

The company sells premium fitness bikes to customers. The basic package for a Peloton bike costs $2,245, while a family package costs $2,694. The treadmill is priced higher at $4,295. At the time of the IPO, the company’s management estimated the total addressable market at 67 million households globally.

In the US, Peloton estimates the total addressable market at 45 million households or 35.4% of total households, which might be too aggressive. However, the company will also be banking on its fitness subscription package to drive sales. The subscription costs $19.5 per month. With a user base of 1.6 million, the subscription will rake-in annual sales of $375 million.

Last month, Peloton acquired its bike manufacturing partner Tonic Fitness Technology. The acquisition will give the company more control over the supply chain and result in savings when it scales operations. Notably, the acquisition was valued at $47.4 million and was an all-cash transaction.

Last year, Peloton launched in Canada and the United Kingdom. The company plans to expand its retail footprint in the United Kingdom to drive sales during the holiday quarter. Peloton is also eyeing international expansion in Germany, which would give it access to the three largest fitness markets in the world.

Profit margins are a concern

Peloton expects to add between 680,000 and 685,000 subscribers in the December quarter—growth of 88% YoY at the midpoint. However, the company’s adjusted EBITDA margin is estimated at -16.3% at the midpoint guidance for the second quarter.

Peloton expects to be profitable by the end of fiscal 2023. The company is sacrificing growth for profitability, which might not be a bad idea if the growth rate remains strong. The road to profitability is long, which is the case for many other tech IPOs. However, investors can expect a bloodbath if the company misses analysts’ estimates going forward.