today is Jan 20, 2022

As one of the highest-flying stocks during the pandemic, Peloton has since come back to reality.

With everyone stuck at home due to shelter-in-place restrictions and social distancing practices during the depths of the coronavirus pandemic, Peloton  (NASDAQ:PTON) absolutely thrived. Quarterly sales growth in excess of 100% was normal, and user engagement was steadily rising. Shares gained 434% in 2020.  

Recently, however, the business is on investors' minds for all of the wrong reasons, including slowing demand, as evidenced by the company's latest earnings release. The stock is down an incredible 72% this year.  

With the stock taking such a beating, is Peloton a good long-term investment now?

Person riding a stationary exercise bike.

Image source: Getty Images.

Pedaling backward  

Peloton's most recent report for its fiscal 2022 first quarter showcased disappointing results. A net loss of $1.25 per share and revenue of $805.2 million both missed Wall Street's estimates. Even worse, management lowered revenue guidance for the full year from $5.4 billion to $4.6 billion (at the midpoint). Ongoing supply chain issues, uncertainty regarding the economic reopening, and softer demand were cited as the main reasons for the disappointing quarter and revised outlook.  

Revenue from sales of connected-fitness products fell 17% year over year -- not a good sign for a business with the goal of wide consumer adoption for its exercise equipment. According to CFO Jill Woodworth, sales of the lower-priced Bike (priced at $1,495) have not met initial expectations.

On a positive note, subscription revenue jumped 94% to $304.1 million, representing 38% of the overall business. This segment carries a gross margin  of 66.7%, much higher than the 12.0% for connected-fitness products. Over time, as more sales come from high-margin subscriptions, Peloton's profitability should rise. At least that's the plan. It all depends on how much equipment the business can ultimately sell.  

Perhaps the most head-scratching development for Peloton recently was the  issuance of $1 billion in stock  on Nov. 16, particularly after the CFO's comments on the recent earnings call . "[W]e don't see the need for any additional capital raise based on our current outlook," Woodworth said on Nov. 4. Shareholders should take this action as a clear warning sign. Sure, Peloton now has the firepower to invest in growth initiatives, but the change in tone by leadership in such a short amount of time, coupled with substantial dilution, is not a good thing. Management could be hinting the financial outlook for Peloton is uncertain.  

A tough industry

Adding to the list of problems are a vast number of competing offerings. These include other at-home fitness equipment like Hydrow, Tonal, and  Lululemon 's Mirror, as well as traditional brick-and-mortar gyms like  Planet Fitness .

As a business that sells premium equipment and wants its customers to engage with its products often, Peloton is struggling to maintain its momentum. In the most recent quarter, sales and marketing expenses soared 148% year over year to $284.3 million, or more than a third of revenue. At the same time, monthly workouts per connected-fitness subscriber fell for the second quarter in a row. Peloton will likely have to keep up its spending to stay on top of consumers' minds in this crowded market.

An innovative product pipeline can be an encouraging way to drive renewed interest in the brand. "We're going to have other new products in the coming quarters that we're excited about," co-founder and CEO John Foley highlighted on the earnings call. While this seems like a promising strategy, it's challenging for any company to constantly introduce cutting-edge new products to the market. And if consumers are already losing interest in the Peloton's bikes and treadmills, there is no guarantee there will be a warm reception for its future product lineup.

As a society, we all know we need to exercise more. Getting people off the couch and doing it consistently, though, is another challenge. The fitness market is extremely fickle, and Peloton could be experiencing this firsthand.  

Stay away from the stock  

After the massive price drop this year, Peloton stock currently trades at a price-to-sales ratio of 2.9, the lowest level in the company's short history as a public company. There remains a lot of pessimism surrounding this business, so investors might view this as a potential buying opportunity.  

But not so fast. The fitness industry has seen countless brands come and go. During the pandemic, Peloton had less competition and significant mindshare among consumers. But as the market evolves, the company must prove it can overcome its recent stumbles.

Until then, I'm staying on the sidelines.

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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.