You remember Peloton stock (Nasdaq: PTON), right? It’s the company behind those stationary exercise bikes + iPad that it sells for a couple of thousand dollars apiece. It was one of the hottest IPOs of 2019. In 2020, Peloton was selling bikes hand over fist. There were ads everywhere for its bikes and it had everyone excited about “connected fitness.” The last thing I remember, Peloton stock was up to like $160 per share. Let me check and see how it did last year, what do you mean it’s down to $30 per share?!
What the heck is going on with Peloton stock?
Peloton Stock: Peloton’s Wheels Are Falling Off
Peloton stock was one of the biggest winners of the COVID-19 pandemic. I mean, it sells a premium stationary bike and went public at the end of 2019. Months after its IPO, gyms were forcefully closed and people were quarantined inside. That’s such perfect timing that it sounds like an analogy I would make up to describe the phrase “perfect timing.”
In 2020, the stock soared 400%. Investors were incredibly excited about the company. However, 2021 quickly started off “not great” as the stock dipped 30%. From March-May, things transitioned to “alarming” as the stock dipped another 20%. Finally, Peloton stock hit “dumpster fire” as it shed another 70% from May till year-end.
Throughout the year, there were several key issues impacting Peloton stock. A few of them are still ongoing. Let’s take a closer look at how so many things could go wrong in just one year.
No. 1 Demand Was Pulled Forward
Peloton was most definitely a pandemic winner. As I said, it was in a perfect position in 2020. Gyms were closed and people were stuck at home. This created the perfect storm for Peloton to crush sales of its stationary bike. Along with its sales, Peloton’s stock price surged.
This is where Peloton’s management team took a big misstep. They mistook the demand during the quarantine as legitimate. Due to this, they kept growth expectations sky-high going into 2021. They didn’t anticipate a sharp drop-off in sales. In all fairness, this can be easy to do when the going is good. Management kept the foot on the gas with lofty earnings expectations, increased production and rapid expansion.
By January 2021, the stock had more-or-less reached its peak. Around this time, gyms started to open up again. When you can just go to the gym to ride a stationary bike, there is a lot less of a need to buy a Peloton. Due to this, demand fell-off big time in 2021.
No. 2 Peloton Stock Botched Crisis Management
In March 2021, a child died in an accident involving a Peloton product. This caused the US Consumer Product Safety Commission to come out and advise people with children or small pets against using Peloton products. Obviously, a child dying due to one of your products is never considered good PR.
However, it didn’t have to be the end of the world. All Peloton had to do was issue a product recall, apologize profusely and announce plans to right any wrongs.
The problem is that Peloton didn’t really take concrete measures to correct this incident. Instead, it just advised people to follow the safety directions more closely while using its products. This could have been another factor that hurt demand for Peloton’s products.
Peloton did end up issuing a product recall months later.
Keep reading for more info on Peloton stock.
No. 3 Cutting The Product’s Price
Cutting the price of its bike was another decision that had investors scratching their heads. After facing declining sales, the management team decided to cut the product’s price by $400.
Slashing the price always sounds like an easy no-brainer way to increase sales. However, in reality, it usually has the opposite effect. First off, cutting prices is a clear sign to investors that sales are slowing. If sales weren’t slowing, there would be no reason to drop the price. For example, think about companies that almost always have high demand. Has Apple ever dropped the price of its newest iPhone after releasing it? Nope, not unless a newer version has come out. Has Disney ever cut ticket prices to its theme parks? Nope. Did Nike’s newest pair of Jordans cost forty bucks? They sure didn’t.
The pricing of a product has such a psychological effect on consumers. Premium pricing tells consumers that a product is incredibly high-quality. It also turns the product into a status symbol. Lower pricing, on the other hand, generally means that a product is cheaper and lower quality.
Up until this decision, Peloton had positioned itself as a premium product. Slashing the price sends a psychological message to both investors and Peloton bike owners. It psychologically devalues the Peloton brand. It also literally devalues the Peloton product because it will earn less revenue per bike sold.
No. 4 Management Cashing Out
A new report shows that Peloton’s management team cashed out major positions a few months back. By “major positions” I mean they sold about $500 million worth of stock. Hmm… yikes.
As a general rule of thumb, insider selling is never good. Peloton’s management team has a direct idea of how the business is performing. If the business was killing it, they would probably be inclined to hold their stock. If the business is struggling, then it probably makes sense to sell before the stock falls. In this case, Peloton stock has fallen big time. This makes it look like insiders jumped ship because they knew the demand was slowing down.
According to the report, these sales were part of a “preplanned selling program.” So, this could have just been interesting timing. Either way, it’s… well interesting timing.
No. 5 Rapidly Changing Direction
To help stop the bleeding, Peloton hired McKinsey, a major consulting firm. It basically brought in McKinsey to help review its cost structure. After “reviewing its cost structure” the verdict was to lay off about 40% of its staff. So, just to clarify. In just one year, Peloton stock went from a high-flying connected fitness company to suddenly firing 40% of its employees.
Peloton is reportedly calling this firing spree “Project Fuel.”
No. 6 Halting Production Of Bikes
Cutting the price of your product is already not a great sign. Do you know what’s even worse? Halting the production of new products. Peloton stock announced that it is halting the production of new bikes. This is mainly due to soft demand and an attempt to cut costs. In reality, Peloton probably has warehouses of products that it’s struggling to sell. If it can’t sell its current inventory then it makes no sense to manufacture more.
Is Peloton Stock A Buy?
So, Peloton stock is down big. Does this create a perfect opportunity to buy the dip?
This is always going to be a personal decision. For me, I was never the biggest fan of Peloton and fall into the “it’s just an iPad on a bike” group. Even as an avid fitness enthusiast, I don’t really ever see myself buying one of their products. To me, there are just a lot better ways to spend a couple of grand if you want to get good workouts in. For this reason alone, I’m out of Peloton for the near and intermediate-term.
Even if you are a huge Peloton enthusiast, I would still recommend waiting. Peloton stock will likely be very volatile in the short term. Give the management team some time to come up with a concrete plan of action. Once they’ve redirected the company a bit, it could be a better time to get back in.
I hope that you’ve found this article describing the situation with Peloton to be valuable! As usual, please base all investment decisions on your own due diligence and risk tolerance.
About Teddy Stavetski
A University of Miami grad, Teddy studied marketing and finance while also playing four years on the football team. He’s always had a passion for business and used his experience from a few personal projects to become one of the top-rated business writers on Fiverr.com. When he’s not hammering words onto paper, you can find him hammering notes on the piano or traveling to some place random.
