Where next after Peloton’s share price hits the brakes?

Peloton’s share price [PTON] looks decidedly out of puff. Between 1 November and 12 November the stock plummeted from just over $90 a share to $49.22 - a mammoth 46% drop -  after the fitness equipment manufacturer cut annual sales forecast by as much as $1bn.

Behind the slashed forecast is  a collapse in demand for at-home fitness products has collapsed as gyms report that membership levels are approaching pre-pandemic highs. For example bricks and mortar gym-franchise Planet Fitness’s [PLNT] stock has jumped over 15% over the same stretch.

Analysts have been caught flat footed over just how draining gym reopenings would be for Peloton’s investment case. However, even though price targets have been trimmed they still represent a decent upside on Peloton’s share price.

Peloton’s share price hits the brakes

During the fiscal first quarter financial report, Peloton slashed its full year forecasts to $4.4bn to $4.8bn, down from a previous forecast of $5.4bn.

Clearly that’s not good, nor was Peloton hitting Wall Street’s top and bottom line forecasts. Revenue came in at $805.2m against a forecasted $810.2m, which is up 6% year-on-year, but well short of the 250% growth in sales reported in the same quarter last year. Losses of $1.25 a share were heavier than the predicted $1.07 a share.

Sales of its fitness products, which includes its bikes and treadmills, fell 17% year-on-year. And while the decision to cut the price of the entry level Peloton Bike helped shift more units, it cannibalised sales of the more expensive premium version.

Peloton said it had also poured $284.3m into sales and marketing during the quarter, a 148% rise year-on-year. Much of it was spent on selling the discounted Bike and its treadmill - just back on the market after having been recalled earlier in the year.

“While the price drop led to conversion rates that exceeded our forecast, overall traffic has not met our initial expectation,” Chief Financial Officer Jill Woodworth said on a call with analysts.

"...overall traffic has not met our initial expectation” - Peloton CFO Jill Woodworth

Analysts downgrade Peloton’s share price

Analysts at Truist downgraded Peloton from Buy to Hold after the dismal earnings results, heavily cutting their price target from $120 to $68. Credit Suisse trimmed its price target from $148 to $112, which would still see a bullish 128% upside, but in a note to clients, the Swiss bank sounded unconvinced about Peloton’s future potential.

“Demand is coming in lower on all fronts leading us to wonder when we might see a return on all the capital they have deployed,” analysts at Credit Suisse wrote. “Long term, the connected fitness opportunity could still be in tact but the path to get there appears more difficult.”

MKM Partners slashed its price target from $130 to $70, along with downgrading Peloton from Buy to Neutral. In an act of mea culpa, analysts there said they were wrong about the headwinds Peloton would face from gyms reopening and that the company would be going into “cash-burn mode now”.

JPMorgan has held to an overweight rating with Christmas coming up, reckoning that the company’s treadmill offering Tread could tap into a market two or three times bigger than Peloton’s bike business. Saying that, JPMorgan removed Peloton from its focus list and slashed its price target from $138 to $90.

Anyone who bought the stock in January when it was trading at above $167 may feel well and truly burnt - and based on these targets won’t be recouping losses anytime soon.

Yet for bargain hunters, hitting JPMorgan’s price target would see an 83% upside on Friday’s closing price, even Truist’s target suggests a 38% upside. However, to get a grasp on where Peloton’s share price is heading and what future growth looks like might take a few more quarters.

“We expect it will take several quarters to determine a more normalized pace of growth, or more skeptically, whether or not the revised outlook is an indication that the core product may be closer to maturity in existing markets than previously thought,” said Stifel Nicolaus analyst Scott W. Devit. “We see limited near-term upside as Peloton works through this digestion period.”

Devit cut his rating on Peloton from Buy to Hold along with chopping his price target from $120 to $70 - still, that’s a 42.2% upside on Friday’s close.