Interactive Platoon (NASDAQ:PTON) the stock fell more than 32% out of trading hours on November 4 following weaker income growth and larger shortfall in quarterly report released after markets closed .
PTON’s latest quarterly results have shaken the confidence of stock market investors in the company’s ability to become profitable. And honestly, maybe now is the time to take a break from Peloton.
Let’s look at the pros and cons of Peloton.
PTON disappoints on both top and bottom results
Peloton Interactive’s quarterly revenue of $ 805.2 million grew 6% year-on-year and exceeded the company’s earlier forecast of $ 800 million. However, investors in PTON shares expected revenue of $ 808.9 million, an annual growth of 6.7%.
The top line failure looks narrow but still confirms that the triple-digit growth rates seen during the pandemic could be a thing of the past. Perhaps indoor fitness is no longer a hot sale as the masses embrace their freedom from home confinement after Covid-19. Gyms are back on the menu for fitness enthusiasts.
Most notably, Peloton’s quarterly GAAP earnings per share (EPS) loss of $ 1.25 compares poorly with a market consensus for a loss of $ 1.05. It was too big a shortfall, you could say.
Reading the latest results for the company in more detail, investors in PTON shares have a lot to worry about moving forward.
Low margins, rising operating expenses weigh on PTON stock
Peloton Interactive’s gross margins are declining, and they could remain depressed for much longer.
Gross profit margins for the September quarter at 32.6% represented a 20% year-over-year decline. The reading was lower than the company’s own forecast of 33%, which was given in August.
The company’s forecast for the next quarter (ending December) is $ 1.1 billion to $ 1.2 billion in revenue with gross margins down to 24%.
Interestingly, management is hoping that a growing subscriber base could help bring total margins down to 32% for the year. Subscription revenues are strong, up 94% year-on-year. However, the picture still remains bleak.
Orientations for the Platoon for 2022
|Prior orientation||Updated guide|
|3.63 million Connected Fitness subscribers||3.35 million Connected Fitness subscribers|
|$ 5.4 billion in total revenue||$ 4.4 billion – $ 4.8 billion in total revenue|
|Gross profit margin of around 34%||Gross profit margin of around 32%|
|Adjusted EBITDA loss of $ 325 million (6% of sales)||Adjusted EBITDA loss of $ 425 million – $ 475 million (nearly 10% of sales)|
PTON management has downgraded its revenue forecast for fiscal 2022, seeing slower growth in the subscriber base, lower margins and larger losses.
The ugly side of PTON’s aggressive pricing strategy
PTON’s new growth strategy attempts to attract new customers through price discounts and longer credit terms of 39 months. Unfortunately, the result is always slow growth, lower margins, a sudden drop in operating cash flow, and larger losses.
To support its aggressive price cuts, the company increased its marketing and advertising spending and invested heavily in inventory. Operating expenses increased 140% year-over-year (to constitute over 77% of total revenue) for the quarter.
One could justify the explosion of expenses by invoking an increase in the workforce, increasing expenditure on research and development (R&D) and the impact of the cost structure of the new subsidiary Precor.
However, this is nothing new. The company’s horrific story of severe operating losses remains intact.
Can PTON Halt Growing Operating Expenses for the Comfort of Stock Investors?
Peloton Interactive failed to break even when it experienced an unexpected increase in demand during the pandemic. Without a pandemic catalyst, the rapid uptake of its bikes, treads, and growth in app memberships throughout 2020 and the first half of calendar year 2021 could have taken a long time. many years in the business.
But with income growth always came greater losses.
Peloton’s revenues have grown faster over the past five years, but operating profits have not been responsive at all. Sales growth greatly exceeded operating profit.
The company experiences more and more operating losses as its turnover increases. This leads investors in PTON shares to question the business model. Perhaps Peloton’s operating model and cost structure is not conducive to profitability.
Pressure is mounting on Peloton’s management to deepen the company’s operating model as an agency issue. Recent evidence has shown that scaling alone will not provide the desired profitability.
And management knows it. Here’s how the company puts it:
“Along with our revised demand forecast, we will take concrete steps to re-examine our expenditure base and adjust our operating costs to better align our investments with our revised growth forecasts. “
Buy the Dip or the Bail Out on Peloton Stock?
Peloton stock may still have its place in a growth portfolio focused on long-term growth given its sustained double-digit growth rates in subscriber numbers. Gross margins increase as subscriptions increase to be a large component of total revenue. Right now, margins remain under pressure as price cuts push hardware sales margins down to around 7%.
PTON stock could rebound further once the market has better visibility on the cost management front. Even more so if subscriptions keep current growth rates high. However, this is still a tricky situation, as high subscription growth also requires high and sustained marketing budgets and pricing incentives. The company may find it difficult to maintain subscription growth while keeping operating costs under control.
More importantly, given the heavy consumption of operating cash in the last quarter that could persist as the company finances its customers with long credit terms, Peloton could be in the market looking for a new cash injection as soon as its capital is immobilized in accounts receivable.
Beware of the potential dilution to come which could lead to further weakness of the Peloton title!
Watching PTON stock from a distance could probably be a stress reduction exercise right now.
As of the publication date, Brian Paradza does not have (directly or indirectly) any position in any of the stocks mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.
Brian Paradza is an investment enthusiast who received the CFA Charter in 2019. A strong proponent of fundamentally-based long-term investing, Brian learns from gurus like Warren Buffett, but recognizes human behavioral tendencies that lead to “ insanity ”in the short term. You may find him curious as he examines technology investment opportunities, cannabis, blockchains, and the new asset class of cryptocurrencies.