In 2021, investors in home stay favorites such as Focus on video communications (NASDAQ: ZM) were disappointed, most of these actions being negative for the year while the S&P 500 the index has climbed more than 20% since the start of the year. Interactive Platoon (NASDAQ: PTON), the company that sells home workout equipment and online workout subscriptions, has suffered a similar fate, with inventory down 40% since this article began writing. This is due to an increase in the churn rate and an equipment recall this spring.
If you are an investor in Peloton, there is no doubt that you hope that the rest of 2021 and the years to come will be much better for this title. Is Platoon ready to come back? We will take a look.
Why is the stock falling?
Aside from the change in sentiment towards expensive home stocks this year, Peloton stocks are likely to be down so much for several reasons.
First, this spring he had a terrible accident with his new treadmill, the Tread +, when a child was pulled under the machine and died. After this accident and many minor accidents with the machine, the Consumer Product Safety Commission recommended that Peloton recall the treadmill in order to resolve the problem.
At first, the company refused the idea, with CEO John Foley refusing to recall Tread +. But a few days later, he announced that Peloton would recall the machines and provide full refunds to customers. Aside from the financial impact on the business, the situation poorly reflected Foley’s management, which likely worried investors.
Second, in its fourth quarter and fiscal 2021 report, Peloton said its monthly churn rate fell from 0.52% in the fourth quarter of 2020 to 0.73% in the fourth quarter of 2021. As I will describe in the sections below, it is vital to Peloton’s business model that the customer churn rate remains low due to the importance of connected fitness subscriptions to this business.
Fourth quarter results are good
In its report for the fourth quarter and full year 2021, which covers the periods ending in June of this year, Peloton presented strong results. Revenue rose 54% to $ 937 million in the quarter, which is all the more impressive as it passed the midpoint of last year’s lockdowns, which gave the company a boost on demand. Connected fitness products (equipment) revenue increased 35% year-over-year to $ 655 million during the period, which includes inorganic growth from its acquisition of Precor. Subscription revenue grew at a much faster rate than hardware, up 132% year-over-year over the period to $ 282 million.
Moving down to the income statement, Peloton’s gross margin for the fourth quarter was 27.1%, with hardware at 11.6% and subscriptions at 63.3%. Hardware’s gross margin was reduced due to the costs associated with the Tread + recall, but this variance shows why Peloton’s subscription revenue is so much more valuable to this business in the long run. With Peloton lowering the price of its original bike from $ 400 to $ 1,495 and management guiding gross margins of 34% for fiscal 2022, it’s clear that this hardware / software gross margin difference will continue.
This means that Peloton essentially sells his equipment with no plans to make a profit, but recovers it through the high margin training subscription service that members can use with him. The company explained this by outlining its directions in the fourth quarter letter to shareholders, saying it expects hardware gross margin to offset sales and marketing expenses, but subscriptions are what will pay off. long term money.
Stock is more expensive than you think
If, as management says, Peloton is looking to break even on equipment sales, investors should really ignore hardware revenue and value Peloton on its high margin subscription revenue. The segment is doing well, growing over 100% year-over-year in the last quarter and revenue of $ 872.2 million in the last 12 months.
However, with a market cap of $ 26.3 billion, Peloton has a price-to-sales ratio of 30 if you only include subscription revenue (remember, management is story you its hardware segment is not meant to make money). It’s very expensive, even for a segment that is growing north of 100% year over year. Now, if Peloton continues to grow its subscription revenue at a high rate for many years to come, it’s likely that this current high valuation won’t matter. He is also exploring new income opportunities, such as a Peloton Apparel line, which could create a lot of value for this company in the future.
But if you are an investor in Peloton, there is no reason for the stock to return in the short term unless it can accelerate subscription revenue growth and / or lower its monthly churn rate to. its level at the heart of the pandemic. If that doesn’t happen, you need to be comfortable holding this expensive stock, as it will likely experience more volatility (up and down) over the next decade, just like in 2021.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.