Peloton FQ1 2022 – The narrative crashes

Peloton is under assault on all fronts.

• Peloton is a warning to anyone who has invested in narrative-driven stocks that when the story breaks and the fundamentals start to matter again, the result is agonising.
• Peloton reported good FQ1 2021 results relative to expectations but was forced to greatly reduce guidance for the full year to June 2022 as demand is suffering as people return to their pre-pandemic lives.
• To make matters worse, input costs from inflation and shipping costs are also hurting profitability meaning that Peloton is no longer a hyper-growth pandemic fuelled technology story but a maker of connected sports equipment with relatively pedestrian growth.
• FQ1 2022 revenues / EPS were $805m / LOSS$1.25 which were broadly in line with estimates of $800m / LOSS$1.08 but it is the coming year where the problems are to be found.
• The $400 cut to the price of its bike has not worked as it had hoped because people are going back outside and back to the gym to exercise meaning that fewer new users are buying bikes and signing up for the service.
• Even existing uses are engaging less and less with the service.
• Furthermore, rising input and shipping costs, negative operating leverage, and brutal competition are all going to take their toll.
• This means that Peloton looks less and less like the Apple of the fitness world and more and more like a commoditising seller of fitness equipment.
• FY 2022 to June revenues / gross margins of $4.4bn – $4.8bn ($4.6bn) / 24% are forecast compared its prior expectations of $5.4bn which was also in line with market consensus at $5.4bn.
• Gross margins were previously expected to be 34% by the company and 34.4% by the market.
• Consequently, the losses endured by Peloton will be much larger as they will be increased by both lower revenues on which Peloton is also making less money.
• Not surprisingly, the shares were hammered in after-hours trading falling 28.2% on very large volumes of shares traded.
• The company’s growth is now going to be around 8% for the coming fiscal year which combined with falling margins has utterly destroyed the narrative that has kept the shares trading at very high multiples of sales.
• The market will now start to scrutinise the financial statements and ask hard questions about what levels of profit and cash flow the company can really generate going forward.
• The powerful narrative of Peloton sweeping the fitness market and putting the gyms out of business with high margin products has been completely swept away and now only the fundamentals are going to matter.
• This lays bare the danger of investing purely on narrative because share price performance is driven by the fund flow and it is impossible to tell when the funds are going to stop flowing into a company’s shares.
• With fundamental analysis, one can least have an idea when a share price has run further than it should have done, giving a signal that it is time to sell.
• Furthermore, when the fundamentals start to matter again, the result in a narrative-driven stock is a bloodbath which in Peloton’s case I do not see letting up.
• Tesla is the prime example of a narrative-driven stock, and the story has held up for far longer than anyone expected, but one of these days it is going to follow Peloton down this path.
• I think that Peloton shares will go much lower than $61.8 which is where they finished up in after-hours trading.
• Consequently, any small bounce in the share price should be used to head for the exit.
• I completely missed this stock on the way up because I could not match the fundamentals with the share price but I remain very happy with my disability.