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How the tables have turned for this once-booming fitness stock.

Connected-fitness leader Peloton Interactive (NASDAQ:PTON) was facing a demand surge and supply constraints during the depths of the pandemic over a year ago. While increased consumer interest is a problem any business would love to have, for Peloton it led to disgruntled customers and lost sales.  

The company's solution was twofold. Management decided to buy Precor , a commercial fitness equipment provider, for $420 million in a deal that closed in April 2021. And in the following month, Peloton announced plans to build a $400 million facility in Ohio, set to open in 2023. Both of these moves were meant to expand manufacturing.  

However, based on the current situation, characterized by weakening demand for Peloton amid heightened competition and gym reopenings, these two investments now appear to have been huge mistakes. Let's take a closer look.  

two people working out at home using Peloton equipment

Image source: Peloton.

Hitting a rough patch  

Unsurprisingly, Peloton's business was flourishing during the pandemic, when people were stuck at home and still wanted ways to work out. Sales increased in excess of 125% for four straight quarters (Q4 2020 through Q3 2021). Peloton's market capitalization was ready to eclipse $50 billion in Jan. 2021. Since then, revenue growth has slowed dramatically, and workouts per month are trending down. Peloton now has a valuation of less than $10 billion.  

The company's monster success invited fierce competition to the space, not only from brick-and-mortar gyms like Planet Fitness but also from the booming emergence of direct rivals like Hydrow, Tonal, and Lululemon 's Mirror. There's no shortage of options for consumers these days.  

As a result of waning customer interest, Peloton has decided to temporarily stop all production of its bikes and treadmills. Management significantly overestimated demand coming out of the pandemic, and it's now forced to focus on resetting inventory levels.  

"From forecasting consumer demand to accurately predicting logistics costs, our teams have never seen a more complex operating environment in which to guide our expected results this year," co-founder and CEO John Foley highlighted on the Q1 2022 earnings call .  

The whole point of Peloton's $820 million investment (for Precor and the Ohio facility) was to boost production. But if demand isn't there, then what is the point?  

Where's the consumer demand?  

Right now, Peloton's management team looks extremely incompetent. Of course, the company's bikes and treadmills could start selling like crazy again. Unfortunately, this dream scenario is far from a reality right now. Revenue from the sale of connected fitness products decreased 17% year over year in the latest reported quarter (ended Sept. 30), so the business is selling less equipment than it did just a year ago.  

Demand for Peloton's high-priced equipment needs to start showing strength for the Precor acquisition and the planned Ohio facility to look like prudent moves by the management team. They would provide Peloton with the distribution and manufacturing capabilities it will surely need should revenue growth resemble pandemic (and pre-pandemic) levels.  

However, there's no evidence to believe that this will happen. Management cut sales guidance for the current fiscal year from $5.4 billion to a range of $4.4 billion to $4.8 billion. To make matters worse, it was reported that the company recently hired consulting firm McKinsey to find ways to reduce costs and streamline operations. This is not indicative of a thriving business whose products are selling like hotcakes.  

The pessimism surrounding Peloton's shares right now is certainly at an all-time high. Should demand trends reverse course, however, the stock looks like a great recovery play in 2022 and beyond.  

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Neil Patel owns Lululemon Athletica. The Motley Fool owns and recommends Lululemon Athletica, Peloton Interactive, and Planet Fitness. The Motley Fool has a disclosure policy.