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Is It Time to Sell Peloton Stock?

Peloton Interactive (NASDAQ: PTON) reported fiscal Q4 and full-year 2021 results on Aug. 26th, and based on the market's immediate negative reaction, the news wasn't good. The at-home fitness innovator was an obvious pandemic winner in 2020, when its stock price skyrocketed more than fivefold. But those good times appear to be over.

The $31 billion large-cap company saw revenue in the quarter soar 54% to $937 million, but this was still a sequential drop from Q3. Adding fuel to the fire was a loss per share of $1.05 that missed Wall Street estimates.

If you're unsure about selling your shares, here are three critical updates to look at that might help your decision.

Image source: Getty Images.

1. The pandemic boost is fading

For the three-month period that ended June 30, Peloton's monthly connected fitness churn (which is a measure of the number of cancellations) jumped to 0.73% compared to 0.52% in Q4 last year. This metric is still pretty solid for Peloton, but it highlights the effect of the increase in consumer mobility that we've experienced over the past few months. The economic reopening is naturally resulting in people spending more time outside their homes. Furthermore, exercise junkies who hesitated about going back to gyms may also be taking that up again, all of which can affect Peloton's churn.

Average monthly workouts per connected fitness subscriber (those who bought a piece of equipment and pay the $39 monthly fee) fell to 19.9, which was down from both Q3 and the prior-year quarter. This supports the argument that the pandemic-fueled boost Peloton was riding last year has faded. The business must deal with heightened competition in the space as well as it tries to sustain consumer demand, resulting in higher marketing expenses for fiscal 2022 following cuts made during the pandemic.

On a bright note, the business did add 250,000 connected fitness subscribers, ending the quarter with over 2.3 million of these extremely valuable customers. While this was less than the number of additions in the previous two quarters, Peloton now has 5.9 million total members on its platform.

2. An accounting issue adds to the problems

Peloton revealed that during its fiscal 2021 audit process, a material weakness was found in its internal controls for financial reporting with regards to the company's valuation of inventory. Management has said that this is nothing to worry about and that it does not require the restatement of past financial statements. Nonetheless, the situation adds further difficulty to the company's troubled recent history.

Anytime a company mentions the phrase "material weakness," it's reason to immediately consider dumping shares. This isn't as bad as, say, Under Armour altering its sales figures, but it's something shareholders need to keep an eye on.

Peloton has been rapidly expanding since its founding in 2012. However, this accounting problem and the ongoing safety issues surrounding the Tread+ are forcing the consumer discretionary brand to grow up. If you plan on staying an investor, you have to believe that leadership will overcome these challenges.

3. Management provides weak Q1 guidance

Peloton's stock is down roughly 9% since its earnings announcement in part because of management's outlook in the near term. Not only are Q1 sales expected to come in at $800 million (meaningfully below the consensus forecast of $1 billion), but the price of Peloton's flagship product, the Bike, is being reduced by $400. Additionally, the business is planning for only 140,000 new connected fitness members in Q1, and it expects churn to increase from Q4 to 0.85%.

If revenue matches management's guidance, that means a paltry 6% growth rate from the prior-year period. And the price reduction of the Bike will eat away at Peloton's margins. The company is obviously lapping the surge in demand from last summer, but the slowdown is officially here, and the key performance indicators prove this.

For Peloton shareholders, the recent quarter's results are a wake-up call. Although the stock has lost more than a quarter of its value this year, it still trades at a hefty nine times trailing 12-month sales. Investors have to believe that the company can navigate this difficult time while also continuing its monster growth in the years ahead. It might be time to part ways with the stock.

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Peloton Interactive, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.


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