Peloton Interactive Inc (NASDAQ:PTON) stock was one of the hero stocks of the pandemic. With lockdowns, gym closures, large numbers of people working from home, and stimulus checks to consumers, 2020 couldn’t have been a bigger opportunity for the company.
Peloton took full advantage of the situation, selling internet-connected exercise bikes and subscription fitness plans at an unprecedented rate. Revenue surged, margins increased, and by the fourth quarter of 2020, Peloton swung to a profit. PTON stock posted growth of 434% for the year.
2021 saw a flood of issues. With vaccinations ramping up, people went outdoors and gyms re-opened. Supply chain challenges became a problem. Peloton’s treadmills were recalled after multiple reports of injuries (and one death).
A Peloton bike was featured in the highly-anticipated Sex and the City sequel, but a character died after working out on the bike. An attempt at a viral ad campaign featuring the dead character imploded after the actor faced sexual assault accusations. In the face of all these headwinds, Peloton’s revenue dropped and PTON stock plummeted 76% in 2021. 2022 may be worse.
Hitting the Brick Wall That is Apple
Peloton is beginning to run up against Apple (NASDAQ:AAPL) and its ambitions, and it has been hurting the company.
Last November, Peloton reported its fiscal first-quarter 2022 earnings. Revenue saw a modest year-over-year bump and missed analyst projections. The only thing that kept the company from seeing revenue decline was a growth in subscriptions.
While sales of Peloton’s bikes and treadmills dropped 17% YoY to $501 million, subscription revenue was up 94% to 304.1 million. PTON stock dropped over 25% in the aftermath, but it could have been worse had subscription revenue not surged.
Peloton’s subscription revenue was a bright spot in an otherwise dismal quarter, but it has a big problem: Apple.
During its earnings call, Peloton said Apple’s privacy changes in iOS 14.5 made it difficult to target iPhone owners with an interest in fitness. The issue was significant enough that Peloton lowered projections for future subscription growth. The company also said this was resulting in higher customer acquisition costs. In that quarter, Peloton’s sales and marketing expenses went through the roof, hitting $248.3 million. That’s a 148% YoY increase.
It Gets Worse for PTON Stock
Advertising costs and reaching iPhone owners are the least of Peloton’s Apple-related issues.
As 2021 wound down, analyst Neil Cybart took to social media to point out that Peloton is in big trouble because of Apple’s Fitness+ service.
Peloton makes revenue from bikes and treadmills and the connected subscriptions that go along with them. But the market for consumers willing to buy the expensive, specialized equipment is limited. The company’s long-term plan is to be a connected fitness platform, selling $13/month digital classes. Anyone can sign up for these, no Peloton bike required. Their importance is already being seen with big increases in subscription revenue even as hardware sales stumble.
That’s where Apple is going to be a thorn in Peloton’s side.
Apple’s Fitness+ subscription offers a similar experience. But it undercuts Peloton’s digital service with a $9.99 price tag. And that Apple Fitness+ membership can be shared among six family members, where the Peloton membership is for one person only.
When part of the popular Apple One service bundle, Apple Fitness+ becomes essentially free for subscribers. Making a bad situation worse, Apple is able to integrate Fitness+ exercises tightly with its hardware like the Apple Watch, iPhone, and Apple TV for a superior experience.
Cybart concluded that Peloton is on track to be a company that is “unable to compete with the giants subsidizing health and fitness tracking as an ecosystem feature.”
It should come as no surprise that PTON stock earns an “F” rating in Portfolio Grader. Peloton was a company that had its moment, but that moment has passed. With supply chain challenges continuing and convincing consumers to buy its connected exercise equipment getting more difficult and more expensive, Peloton faces a rocky road ahead.
Going up against Apple as it tries to ramp up digital subscription revenue is not going to make its prospects any rosier.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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