Peloton Interactive, Inc. (PTON) is trading lower by more than 6% in Friday's pre-market despite beating second quarter 2021 top- and bottom-line estimates, posting a profit of $0.18 per share while revenue rose an astounding 128.4% to $1.06 billion. Shareholders ignored the upbeat results, even though the company raised revenue guidance for the third quarter and the fiscal year, suggesting that the stock was fully valued prior to the release.

Key Takeaways

  • Peloton has sold off despite beating second quarter 2021 top- and bottom line estimates.
  • Chronic delivery delays may be weighing on investor sentiment.
  • The company will have to compete with reopened fitness centers in coming years.

The fitness juggernaut has struggled with long lead times and frustrated customers since the pandemic lockdown in March 2020, with surging demand outstripping limited supply by a wide margin. Needham analyst Laura Martin summed up this headwind on Friday, noting, "Many investors we speak with believe PTON squandered brand value through elongated fulfillment times and rescheduled delivery dates in calendar H2 2020." 

The company is taking steps to alleviate these bottlenecks, buying commercial fitness equipment provider Precor in December to speed up deliveries and research new product lines. And if price action after prior releases is any guide, many investors will use this morning's "sell-the-news" reaction to scoop up shares at lower price levels. Even so, Peloton will need to compete with reopened fitness centers in coming years, likely yielding a slower growth trajectory.

Martin raised her price target on Peloton stock to $180 despite cautionary comments, adding, "Organizational learning is an important value driver. Using the U.K. as a test market and delaying a U.S. launch of the lower-priced tread are positive data points about PTON's learning speed. Importantly, PTON's annuity stream of monthly sub revs is 2x more valuable in calculating long-term value than its 1x hardware sales, so we have no issues with PTON spending $100mm in Q3 2021 to air ship hardware to protect delivery dates and brand value, and grow its installed base."

Raymond James downgraded Peloton stock after the earnings release, but Wall Street consensus is still locked into a "Strong Buy" rating based upon 19 "Buy," 3 "Hold," and 1 "Sell" recommendation. Price targets currently range from a low of $110 to a Street-high $190, while the stock is set to open Friday's session more than $16 below the median $162 target. This lower range placement suggests that the post-news downdraft will bottom out quickly.

Tip

A bottleneck is a point of congestion in a production system (such as an assembly line or a computer network) that occurs when workloads arrive too quickly for the production process to handle. The inefficiencies brought about by the bottleneck often create delays and higher production costs. The term "bottleneck" refers to the typical shape of a bottle and the fact that the bottle's neck is the narrowest point.

Peloton Daily Chart (2019 – 2021)

Chart showing the share price performance of Peloton Interactive, Inc. (PTON)

TradingView.com

The company came public at $27.00 in September 2019 and turned higher, topping out at to $37.02 in December. The subsequent decline accelerated through the through the IPO opening print in March 2020, hitting an all-time low at $17.70, ahead of intense buying interest that completed a round trip into the prior high in April. The stock broke out of a cup and handle pattern about three weeks later, entering a powerful trend advance that ended at $139.75 in October.

A rounded correction into December yielded a secondary breakout that topped out above $167 just two sessions later. The stock failed a Jan. 14 breakout attempt, posting an all-time high at $171.09 and turning lower into month's end before bouncing at the 50-day exponential moving average (EMA). This price action has carved a rectangle pattern, with resistance in the upper $160s and support near $142. Peloton stock is trading about five points above that trading floor on Friday morning.

Tip

A rectangle is a pattern that occurs on price charts. A rectangle is formed when the price reaches the same horizontal support and resistance levels multiple times. The price is confined to moving between the two horizontal levels, creating a rectangle. The concept of a rectangle is similar to a Darvas Box.

The Bottom Line

Peloton is selling off despite beating second quarter top- and bottom-line estimates, and the stock will need to hold support in the low $140s to maintain the current uptrend.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.