Peloton Profit Snapshot Q1: Has the drop in the price of the bike resulted in more sales?

Manufacturer and seller of interactive exercise equipment platoon (NASDAQ: PTON) saw an increase in customer demand for its products at the start of the pandemic. People who saw gyms close to the public turned to home exercise options. At one point, Peloton had so many orders that customers had to wait ten weeks for delivery.

COVID-19 vaccination rates have accelerated around the world, allowing governments to reduce trade restrictions. Gyms are reopening, thanks to disaster loans offered at sites like Green Day Online. This has resulted  in stabilization of sales of Peloton products. To stimulate demand and fend off competition, Peloton lowered the prices of its bikes by $ 400 just a few months ago. When the company releases its first quarter of fiscal 2022 results on November 4, investors will want to see increased unit sales due to the decline.

The peloton’s stock has fallen by more than 40% this year as economies reopen. Image source: Getty Images.

Lower bicycle prices could deter competition

From 2017 to 2021, Peloton’s revenue nearly doubled each year, from $ 219 million to $ 4 billion. In addition to selling exercise equipment, Peloton sells a monthly subscription that allows users to access live and recorded lessons.

In its final quarter, revenue growth slowed to 52% from the same quarter a year earlier. A combination of factors, including the reopening of economies, have reduced enthusiasm for Peloton products. Management has estimated that its revenue growth rate will slow further, forecasting revenues of $ 5.4 billion for fiscal 2022. If the company met this target for the year, it would be 35% higher than the 4 billion dollars from the previous year.

Peloton also expects gross profit margin to decline by more than 200 basis points year over year, which will make matters worse. Lowering the price of its bikes by 20% or $ 400 will reduce gross profit margins, but the company hopes it will improve total gross profits by selling more units. Customers who purchase a connected fitness product like the bike will subscribe to Peloton’s interactive exercise classes for $ 39 per month per household.

In addition, by lowering its price on the bicycle, Peloton will discourage competitors from encroaching on its business. Higher profit margins often encourage the entry of competitors attracted by potential profits. By lowering prices, Peloton sends a message to competitors to stay away. The decision may be beneficial in the long run, but it could negatively affect income and profits in the short term.

The market falls in love with the Peloton share

For its fiscal first quarter 2022, Wall Street analysts expect Peloton to report revenue of $ 810 million and loss per share of $ 1.07. The revenue estimate is over the $ 800 million Peloton guided for the quarter. Either way, even if Peloton hits Wall Street’s revenue estimates, that would be a paltry 8.4% increase from the same quarter last year.

The market is not responding well to the slowdown in Peloton’s growth. The title is down 41.3% since the start of the year. Management can help stop the bleeding if they report better-than-expected customer response to their bike’s price drop.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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