today is May 20, 2022

Although Peloton Interactive ( PTON 4.82% ) was riding high throughout the pandemic, it now seems like its troubles can't get any worse. The company's stock, which gained 430% in 2020, slipped 76% last year, and it's now trading below its initial public offering (IPO) price of $29. Let's explore why the stock tanked, and whether or not it can recover this year.

A quick succession of unfortunate events

Last week was an awful week for Peloton after it raised delivery fees for some products and word leaked that it was decreasing production. Its website says that setup and delivery will begin to cost $250 for its bikes and $350 for its treadmills after Jan. 30.

A person running on a Peloton treadmill watching a video workout.

Image source: Peloton Interactive.

As for production, the company said unfounded rumors about the scope of the strategy spread to the news media, and it was taking legal action against the instigator. CEO John Foley attempted to calm the situation in a note that said, "We feel good about right-sizing our production, and, as we evolve to more seasonal demand curves, we are resetting our production levels for sustainable growth."

undefined Stock Quote

Today's Change

(4.82%) $1.30

Current Price

$28.30

On the same day, management gave an encouraging preliminary fiscal second-quarter earnings report (for the period ending Dec. 31), with revenue in line with guidance at 7.5% growth, or $1.14 billion. Connected-fitness subscriptions numbered 2.77 million, slightly below estimates of 2.8 million to 2.85 million. Average monthly churn was a low 0.79%, and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were between a $260 million to $270 million loss, versus an expected $325 million to $350 million loss.

But it wasn't enough to stop the decline, and the stock is now down 24% in January. And according to The Wall Street Journal, an activist investor is now pushing for Peloton to fire its CEO or look for a sale to a larger fitness company. According to the report, Blackwells Capital, which owns less than 5% of Peloton's shares, blames Foley for mismanagement.

Is a turnaround even possible at this point?

Although Blackwells has forced companies to do its bidding before, it seems unlikely in this case, since Foley and other Peloton insiders own supervoting Class B shares that give them 80% of Peloton's voting power.

I've argued over the past few months -- after the company revealed in the summer that sales growth was sharply decelerating -- that customers are happy with their Peloton equipment and are still paying up for monthly subscriptions. The maintenance of the low churn rate adds to that confidence.

But stimulating higher sales growth might be more problematic in the post-pandemic era. The company probably would have been better off without the mega-growth from the pandemic, giving it the ability to grow more slowly and scale more gradually.

That leads to the bigger issue, which is profitability. There was pressure on the bottom line as the company scaled to meet demand, which has now fallen. In the first-quarter conference call, Foley said: "To maintain a premium end-to-end member experience, we made significant investments over the past year to scale manufacturing, logistics, and operations. Overall, we believe we met the challenge, but there's no doubt that in some cases, we overcorrected."

Even more, margins in the first quarter were pressured by higher costs and higher-than-anticipated treadmills returns. At the end of the first quarter, Peloton had an ample $612 million in cash, although that was less than half the end of the 2021 first quarter.

Peloton is dealing with intense challenges, and it has a lot to prove this year. Can it recover? I think it can. It would have to make significant changes, which it says it is already doing. These include moves such as the scaling down and increasing fees. But the road to recovery will be long and twisty, and there's no guarantee that all will turn out well for investors.

What should investors do?

Buying shares at this point is a risky prospect. Current shareholders are in a different boat, and selling now would result in a loss for many of them. It's never a good idea to sell out of fear, unless there's significant worry that the company will go under, and it doesn't look like Peloton is quite there yet. 

In the meantime, after a show released just last month featured a character dropping dead after a Peloton workout, another show premiered this week with a similar storyline. Whatever happens, Peloton will probably continue to draw lots of attention, and the stock is likely to stay volatile in 2022.

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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.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns and recommends Peloton Interactive. The Motley Fool has a disclosure policy.