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Was Peloton's Big Win Really a Whiff? 3 Things Investors Need to Know

Motley Fool - Sat Mar 9, 9:45AM CST

Peloton Interactive(NASDAQ: PTON) is attempting to shift its business model from one based around selling physical exercise devices to one built around subscriptions. That's not a bad plan, but the sale of its namesake exercise bikes, treadmills, and other devices is still a vitally important way to build a strong subscriber base. That's why management was so happy to report that sales of these items increased 77% in the fiscal second quarter of 2024. That sounds great, and it is, but it isn't nearly as great as the company wants you to think it is.

Peloton is focused on the positives

Like all companies, Peloton tries to emphasize the things that are going well. That's completely normal and expected behavior. The problem arises with investors, who often believe what companies say without digging into the story to make sure the cheerleading is actually backed up by the numbers. Usually it is, but sometimes management cherry-picks data in an effort to put its best foot forward.

A person on an exercise bike.

Image source: Getty Images.

So when Peloton reported that sales of its physical devices rose 77%, the first reaction from investors probably should have been to look more closely at the data. The goal isn't to see whether management is lying, which usually won't be the case. The goal is to decide for yourself whether the strong numbers are actually as good for the business as management wants you to believe. In Peloton's case, they may not be. Here's why.

1. Sequential and driven by new relationships

The 77% revenue increase that Peloton highlighted in the fiscal second quarter was relative to the first quarter. So it was a sequential increase -- and that should cause you a little consternation. The question on your lips should be: How does a company increase sales 77% in a single quarter? In this case, the answer is that it developed new relationships with retailers, including Amazon and Dick's Sporting Goods. Those relationships are basically meant to replace/augment the company's own efforts to sell directly to customers.

So the real story is that adding new sales channels resulted in a big boost to sales. That's hardly shocking.

2. Probably just a one-time increase

The next step in the logic is to ask: What happens from here? It seems highly unlikely that the two new sales channels will continue to increase sales at such a rapid clip forever. It's more likely that the big jump was a ramp-up that will now flatten out. That means investors should not go in expecting the sale of devices to suddenly become a long-term growth driver. The products are important, but only insofar as they help to drive customers to the company's new focus on its subscription business.

There's also the not-so-subtle fact that the big boost occurred during the company's fiscal Q2. That happens to include the key holiday shopping season, a time of year when customers often buy big, expensive items for loved ones (and themselves). That may not be a sustainable result through the other three quarters of the year.

3. Year-over-year sales fell

The last point is potentially the most notable. Peloton's physical device sales fell 16% year over year. That's right, the huge sales gain could also be viewed as a fairly substantial sales decline. If you take the "glass half full" view of the Q2 device sales figure, the story is clearly a lot less positive. In fact, it even hints at a business that is weakening. Peloton's devices turned into a fad during the early days of the coronavirus pandemic, and people have simply moved on to other, more exciting fads. The growth in device sales between the first and second fiscal quarters doesn't change this fact.

Peloton is still a work in progress

Peloton isn't necessarily a bad company. If it manages to shift its business model in the way that it plans, it could actually be a good investment. But the strong device sales in fiscal Q2, taken in isolation, don't provide enough information for investors to change their view of this niche consumer discretionary company. You have to look at the bigger picture, which suggests that there's still a lot of work to be done here. Peloton remains most appropriate for aggressive investors.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Peloton Interactive. The Motley Fool has a disclosure policy.

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