Peloton’s Backpedaling Continues

Earnings, Technical Analysis, Technology Stocks

Shares of Peloton (PTON) hit another fresh 52-week low, with the company’s latest news revealing it would be temporarily halting production of its fitness products. The once-darling of Wall Street has seen its stock price fall from an all-time high of $166.57 to the mid-$20’s, for a decline of 86%.

Young woman on exercise bicycle with video monitor.

Internal documents from earlier this month revealed demand for Peloton’s connected fitness equipment remains in a free-fall due to consumers’ price sensitivity and increased competition. Additionally, the reopening of gyms over the past year has seen consumers shift back away from spending money for at-home fitness equipment.

These latest developments represent a clear sign PTON will be looking to slash costs while attempting to control its inventory levels. This will also likely include job cuts along with store closures.

This is a dramatic reversal of fortune: PTON faced the exact opposite issues just over a year ago, when the company experienced high demand and not enough inventory.

PTON’s earnings are due out in early February; analysts currently expect a loss of $1.28 a share with sales near the $1.2 billion mark. Some analysts think the company could lose as much as $1.51 per share, while others believe losses will come in at $0.89 per share. Given the latest news, the losses could be worse than expected.

Moreover, for fiscal year 2022, losses are expected to reach $2.85 per share; for 2023, Wall Street is expecting red ink of $0.87 per share. Sales estimates of $4.5 billion and $5.6 billion, respectively, over the next two years could also now be lofty expectations.

In its previous quarter, Peloton said it had nearly 2.5 million connected fitness subscribers. However, they only added 160,000 net new members, its lowest growth in two years. This trend is another worrisome signal going forward.

On a technical basis, shares have been in a nasty downtrend since early November, with the current trajectory showing a possible drop into the low $20’s, and maybe in the teens. Major resistance going forward will likely be at the $30 level.

Chart showing Peleton's current and historical price.

The relative strength index (RSI) is showing the stock is oversold with a reading below 30 but this doesn’t mean a bounce from current levels. RSI fell to towards the 20 area following its last earnings update in November.

The PTON February 30 puts were already expensive before the latest news hit as traders were anticipating continued downside weakness with shares near the $32 level. These puts were trading at $3 and zoomed to a high of $10 last Thursday before closing above $7. These options expire on February 18th and are nearly $6 “in-the-money”.

While it might be tempting to chase additional put options, they have become expensive given the heightened volatility surrounding the stock. Shorting the stock might be a more attractive alternative but this can also be a risky strategy if there is a short-covering event after earnings are announced.

Perhaps the best strategy is to avoid Peloton altogether until the company can provide a clearer outlook going forward.