Peloton Q2 preview: Where next for Peloton stock?

When will Peloton release Q2 earnings?

Peloton is scheduled to publish second quarter earnings after US markets close on Tuesday February 8.

Peloton Q2 earnings preview

What a difference a year can make. Just 13 months ago, as we entered 2021, Peloton was riding high and trading at record highs that valued the business at over $48 billion. Since then, shares have lost over 80% of their value and today the company is worth closer to $8 billion.

So, what happened?

Peloton was the epitome of a ‘stay-at-home stock’. In 2020, when the pandemic started to unfold, Peloton was smashing expectations. At one point, during the September quarter of that year, earnings came in three times higher than anticipated as people rushed to buy fitness equipment for their home while they were stuck in lockdown.

The spike in demand, coupled with the start of the global supply chain crisis, meant Peloton was struggling to keep up and that people were waiting months for their equipment to arrive. Convinced that the higher level of demand would be sustained and determined to prioritise service over profits, Peloton began ramping-up production – including splashing out $420 million to buy Precor to significantly expand its manufacturing capacity in the US – and spending millions more on securing the freight and transport it needed to get its equipment to customers. This, understandably, knocked its profitability.

By the middle of 2021, Peloton was facing further problems after safety issues involving its new treadmill, prompting a costly $165 million recall of around 125,000 bits of kit. Forced to cancel and refund orders while it addressed the issues, Peloton’s revenue outlook started to disappoint because of the lost Tread sales and the company then swiftly re-entered the red as lower sales and higher costs started to take their toll.

That was then exacerbated when lockdown restrictions started to ease in the second half of 2021, prompting more people to leave their Peloton equipment idle in the corner and head back to gyms as they reopened. Peloton went from scrambling to meet demand to having to slash prices in order to attract more customers at a time when manufacturing and transportation costs were spiralling higher. Peloton, having delivered three consecutive quarters of profit and steadily installing confidence the company was self-sustaining and comfortably in the black, slashed its revenue forecast by $1 billion after demand tapered off more than the company had expected and abandoned hopes of turning a profit in the current financial year that runs to the end of June 2022 – stating it would not return to profit at the adjusted Ebitda level until fiscal 2023. The average number of workouts per subscriber has been falling since the third quarter of fiscal 2021, demonstrating that engagement levels have dropped significantly since Covid restrictions have eased.

That culminated in activist investor Blackwells Capital last month accusing the board of mismanagement and calling for CEO John Foley to be sacked and for the company to be put up for sale, in the belief that the collapse in its share price could make it an attractive acquisition target.

‘Remarkably, the company is on worse footing today than it was prior to the pandemic, with high fixed costs, excessive inventory, a listless strategy, dispirited employees and thousands of disgruntled shareholders,’ said the chief investment officer at Blackwells in a letter sent to the Peloton board.

While the debate over whether Peloton represents an enticing target is still ongoing, Blackwells other points remain firmly in play considering the flip-flop nature of some of Peloton’s decisions over the past year.

For example, when the decision was made to start ramping-up production in 2020 to capitalise on rising demand during lockdown, management admitted the idea of ‘overbuilding supply chain capacity’ had never been discussed by the board. A year later, Peloton warned it was having to downsize both its workforce and manufacturing because demand was tapering off at a faster pace than had ever been anticipated. Similarly, having burnt through a large chunk of its cash reserves in the last quarter, CFO Jill Woodworth said ‘we don’t see the need for any additional capital raise’ and yet two weeks later Peloton announced it was raising $1 billion by issuing new shares at $46 each. That was priced last November, and today the stock trades closer to $23 – below its $29 IPO price set when it listed in September 2019.

That takes us to today. Peloton clearly has a job to do in reinstalling confidence behind its prospects, although pressure from investors remains a negligible threat for the business considering its dual-class share structure means management retain ultimate control over the company. Still, this has not stopped markets reflecting their concerns through the share price.

We already know that Peloton ended December with 2.77 million connected fitness (CF) subscribers, having grown from under 2.50 million at the end of September. That disappointed markets considering Peloton had originally said it aimed to end 2021 with between 2.80 to 2.85 million subscribers.

Peloton has already provided a glimpse into what to expect when it releases second quarter earnings after releasing preliminary results last month. It said revenue will be around $1.14 billion compared to $1.06 billion the year before.

Peloton has said it will report an adjusted Ebitda loss of between $260 to $270 million. That will turn from the $116.9 million profit booked the year before and mark the third consecutive quarter where losses have ballooned sequentially.

So, subscribers and revenue continued to grow in the second quarter, but investors are wary this could change going forward. Wall Street currently expects revenue to drop 0.3% year-on-year in the third quarter covering the first three months of 2022 and although connected fitness subscriber numbers are forecast to continue growing, it is expected to be at the slowest pace since the start of the pandemic.

Over the longer-term, Peloton needs to get its cash burn and profitability under control. Peloton needs to keep its promise to return to positive adjusted Ebitda in fiscal 2023 and demonstrate it has enough cash to survive until then following the recent fundraise. Investors will want to see signs the company is making progress when it publishes results this week with a buoyant outlook, but profitability is likely to remain under pressure and the cash burn high over the coming quarters considering the rise in costs, heightened promotional activity and the tapering of demand as the global economy continue to reopens.

One way Peloton can improve profitability is by shifting a larger proportion of sales to its newer and more expensive Tread from its lower-priced and lower-margin exercise bike, although initial demand has been hampered by the safety issues seen last year. An improvement in subscriptions could also help improve margins.

Where next for PTON stock?

Peloton shares have plunged over 70% since releasing its last set of disappointing results in early November, with the stock sinking below $23 to hit a 22-month low last week before managing to attract some buyers back into the market.

Notably, trading volumes have been markedly higher since it released its last of earnings, reinforcing the idea the current downtrend could continue. That is supported by the fact the RSI has remained in bearish territory since the results and the fact the 50-day sma remains significantly below the 100-day sma, which in turn sits below the 200-day sma.

If the stock breaks back below the 22-month low of $22.80 then it is likely to continue trudging lower toward the all-time low of $17.70 seen back in March 2020. Any break below here would be highly significant.

The 50-day sma has acted as a ceiling for the stock for the last six months so this is the first level that needs to recaptured before the stock can start to eye the 100-day sma at $58.

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