Higher subscription churn and decelerating growth are weighing on the stock today.

John

Key Points

  • The days of triple-digit revenue growth appear over, as management forecasts 35% growth in revenue in fiscal 2022.
  • Growth comparisons will remain challenging, but Peloton still has a great product to build on for long-term growth.

What happened

Shares of Peloton Interactive (NASDAQ:PTON) were trading down 8.8% at 9:54 a.m. EDT on Friday after the company delivered a disappointing earnings report for the fiscal fourth quarter of 2021. Peloton reported better-than-expected revenue, up 54% year over year reaching $937 million, but it posted a loss of $1.05 per share, lower than analysts estimates that called for a loss of $0.44.

More concerning was the companys forward guidance, which calls for revenue to increase by 35% in fiscal 2022. This is a significant deceleration compared with the triple-digit rates investors have gotten used to over the last few years. 

So what

The good news was that demand for Pelotons products remained quite strong in the quarter. Total members grew to over 5.9 million, driven by 114% growth in connected fitness subscriptions and 176% growth in paid digital subscriptions. But higher churn and operating expenses offset those bright spots.

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Image source: Getty Images.

While the average monthly churn rate during the quarter more than doubled to 0.73%, management said this level was better than expected, given the normal seasonal patterns during warmer months. Still, this higher churn is a sign that Peloton is experiencing a headwind as the economy, and gyms for that matter, reopen.

As for profitability, gross margin was 27.1%, below managements expectations, driven by higher return rates for the recalled Tread and Tread+. The company also shifted more marketing spend from the previous quarter to fiscal Q4 and added its acquisition of Precor to its financials. Sales and marketing expense increased to 24.5% of total revenue compared with 13.9% in the year-ago quarter, which contributed to a net loss on the bottom line of $313 million, or $1.05 per share. 

Now what

On top of the decelerating growth, Peloton announced a lower price for its original Bike model, which comes a year after introducing a price cut for its flagship product. This seems to have added fuel to the sell-off, as it looks more defensive than offensive at this point, although management explained its part of the long-term plan to broaden access to its products. 

The year-over-year growth comparisons will remain challenging in the near term, but its not over for Peloton. These challenging growth comparisons will eventually pass and what will remain is an emerging fitness brand with a massive market opportunity to expand into over the long term.

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.

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

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