Negative Signs on Peloton

Peloton (PTON) stock took a major tumble today on a report by CNBC News that they had seen internal documents purporting to indicate that Peloton had temporarily halted production in bike and treadmill production, sending the stock down nearly 25% to $24.14. I've been negative on Peloton since the start of the year, and its based on three major negative signs of managements stock sales, high inventory levels, and Apple, indicating a tough ride ahead for the stock.
andrew-valdivia-AB7TcT_GVU0-unsplash.jpg 500 KB
Sign #1 - Management Stock Sales Not Encouraging

I don't usually put much weight on management stock sales, which in the normal course can be expected to happen. However, it raises my interest when I see multiple executives sell stock of significant value, at the same time that the company appears to be at an important juncture, portending to either a possible negative cycle or perhaps a positive one. I was smelling a negative cycle as subscriber number growth has been sharply declining and that the company indicated that customers were opting to buy the cheaper equipment models, both negative signs.

Management of the company, comprising of officers, sold approximately 3.6 million shares in 2021, which assuming an average price $100 in 2021, equates to $360 million. Albeit, these sales were mostly connected to stock sale plans already in place, management always has the option to not be selling, which in this case, they were clearly voting with their sales.  Again, I don't put much weight in insider buys or purchases, unless when combined with other information, lays out a pattern of something either negative or positive forthcoming. By itself, officers are usually busy doing their jobs and are not financial market experts, as shown by the multitude of companies that have failed over history and the fact that management most often still has most of their ultimately valueless shares.

Sign #2 - High Inventory Levels Look Alarming

Inventory has been climbing at a faster rate than revenue growth, which is not a good sign. Inventory was at $1.2 billion on September 30, 2021, up 28% from the $937 million on June 30, and 130% up from the $522 million on December 31, 2020.  Sales actually declined in the September 2021 quarter to $805 million, down from $936 in the prior quarter. Its rare that I've seen inventory levels climb so quickly, but it makes sense with the boom in sales due to COVID, and the likely exhaustion of potential customers that were excited to work out in their homes.

Sign #3 - Apple is a Serious Threat

Peloton largely dominated the digitally-connected health segment up to and into COVID. Their equipment has been expensive relative to other non-digitally-connected equipment, combined with a costly subscription to an online fitness program. But as is often the case, the number of early adopters were exhausted, and cheaper equipment looked more compelling to the rest of us. Then along came Apple (AAPL) in December 2020, and its launch of Apple Fitness +, an Apple Watch based program that interconnected with other Apple devices such as with an iPad or Apple TV, and a monthly price of just $9.99 a month or $80 a year, versus $40 a month for Peloton (of $12.99 for just the app). Apple can afford to subsidize its service as it appeals to Apple customers that want to utilize the integration with their existing Apple devices, which does not bode well for Peloton. There are plenty of companies, from Tile (Apple AirTags) to Fitbit (Apple Watch) that did well in their space up until Apple entered it, which initially expanded interest in the space, but ultimately lost their place on the mantle as the industry leader.

Screen Shot 2022-01-20 at 2.09.36 PM.png 466 KB

Carson Cole

January 20, 2022