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Peloton Tumbles as Wall Street Seeks Signs of Path to Profit

Julie Verhage
Peloton Tumbles as Wall Street Seeks Signs of Path to Profit

(Bloomberg) -- Peloton Interactive Inc. tumbled after frustrating investors with a focus on growth rather than profitability.

“For us, profitability is a managed outcome,” Chief Executive Officer John Foley said on a call with analysts. “I believe if we pulled back on growth, we could be profitable tomorrow, but that is not what the board and the leadership of Peloton believes we should do.”

The stock sank following the call, after being up more than 7% in early trading when the earnings were published.

Wall Street is increasingly looking for realistic paths to profitability over growth-at-all-costs. Investors have shunned other IPOs this year that hewed to that model, including Uber Technologies Inc., Lyft Inc. and Slack Technologies Inc., which have all dropped at least 15% since their IPOs.

New York-based Peloton, which sells a stationary bike, a treadmill and a subscription-based app for live and on-demand classes, said its loss narrowed in the first quarter to $49.8 million, or $1.29 a share, from $54.5 million, or $2.18. That beat analysts’ prediction for a loss of $114 million. But earnings before interest, tax, depreciation and amortization aren’t expected to be positive until 2023.

After pricing shares at $29 in September, Peloton has fallen as low as $21.08. The stock was trading at $22.78 at 10:47 a.m. in New York, down 7.4%.

In an interview, Foley described the market rout after the IPO as a “perfect storm of being lopped into all kinds of buckets that were unfortunate and wrong.” While various factors, from fitness fads to an IPO hangover and the overall economic environment, conspired against them, Foley said he had no regrets on the timing of the stock listing. “We’re all playing for the long game,” he said in an interview.

Sales will be $1.45 billion to $1.5 billion in the year ending in June, Peloton said Tuesday in a statement. Analysts, on average, projected $1.39 billion, according to data compiled by Bloomberg. First-quarter revenue more than doubled from a year earlier to $228 million, compared with estimates of $199.4 million.

Founded in 2012, the company describes itself as the “largest interactive fitness platform” in the world. It added 52,000 connected fitness subscribers in the first quarter to almost 563,000, slower growth than what it had experienced in the previous quarters, though the three-month period ended Sept. 30 is historically slow heading into the holiday season, the company said. Peloton, in a presentation to investors, said the fiscal second and third quarters are the strongest for revenue and subscriber growth “when we benefit from holiday sales, New Year’s resolutions and colder weather.”

Peloton also has an app that shares its exercise programming with users who don’t own the hardware, but are willing to pay a monthly subscription fee for classes, which include yoga, meditation and strength training.

Foley said sales in Canada and the U.K. “are ahead of expectations” and also “dramatically further ahead than at the similar time in the U.S.” Peloton will launch in Germany on Nov. 20, giving it a presence in the three largest fitness markets in the world, according to the company. Germany will also mark the first non-English offering. Sales and marketing expenses for these new areas and a continued push in the U.S. is a key reason why the firm is still operating at a loss.

Peloton quietly acquired a Silicon Valley engineering firm, Gossamer Engineering, earlier this year to help it ramp up in-house development of products, according to people familiar with the transaction.

The company launched a 30-day in-home free trial in early September, which could help with New Year’s fitness goals looming, JPMorgan Chase analyst Doug Anmuth wrote in a recent note to investors. The company is also planning to open new studios in New York and London, which could boost the stock, according to MKM analyst Rohit Kulkarni. On the call, the firm said that this will impact member churn in the coming quarters, since users that decided to send the hardware back within the 30-days will be counted.

(Updates with comments from analyst in fourth paragraph.)

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