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Can Earnings Help Left the Tide for Peloton Stock?

Peloton stock lost 14.5% yesterday and was trading sharply lower in US premarket trading today after announcing a recall of its treadmills. The company is set to release its quarterly earnings today after the close of markets.

In March, Peloton’s treadmill was involved in an unfortunate accident that caused the death of a child. However, while the company had then admitted to the event along with some other instances of accidents involving children, it had not talked about a recall.

Peloton treadmill was involved in a fatal accident

Instead in a note, its CEO John Paul Foley listed various precautions while using the company’s equipment. He had advised keeping children and pets away from the equipment at all times. He also urged users to ensure that the space near the equipment is totally clear before they begin the workout. Foley also advised users to remove the safety key after using Tread+ and storing it at a place that is away from the reach of children.

Previously, Foley had publicly said that the company has “no intention” of recalling the Tread+ even as the Consumer Product Safety Commission (CPSC) warned users to stop using the Tread+.

Foley admits to a mistake

Meanwhile, Foley has now admitted to making a mistake of not making a recall. “We should have engaged more productively with them from the outset. For that, I apologize. Today’s announcement reflects our recognition that, by working closely with the CPSC, we can increase safety awareness for our Members,” said Foley.

He added, “We believe strongly in the future of at-home connected fitness and are committed to work with the CPSC to set new industry safety standards for treadmills. We have a desire and a responsibility to be an industry leader in product safety.”

Wall Street analysts weigh in on Peloton recall

While Wall Street has been generally bullish on Peloton stock, several analysts have issued critical notes after the recall. “We view this as another sign that Peloton’s voice and platform grew faster than its business, and it is still working to grow into its fame,” said BMO Capital Markets analyst Simeon Siegel.

Sounding critical of the company, Siegel added, “With a still ~$30 billion market cap vs. consensus-expected ~$4.1 billion of FY21 revenues, Peloton’s market value looms much larger than its expected results and we believe one can argue more of Peloton’s market value has been created by its marketing department than by its engineers or instructors. Recommend the bike, worried about shares.”

Bank of America downgrades stock

KeyBanc’s Edward Yruma said that “The voluntary recall of Peloton’s Tread and Tread+ is a clear negative.” Bank of America analyst Justin Post lowered Peloton’s target price from $150 to $100 and downgraded it from a buy to neutral.

“We think tread overhang will impact the Street’s long-term subscriber growth outlook and, therefore, the stock’s multiple,” said Post. He added, “Our biggest concern on the news is not the potential loss of Tread+ subscribers (about 5% of total, but we think many will keep their Tread+ units), but the potential impact on the launch of the new lower-priced Tread.”

The counter view on Peloton

Meanwhile, some analysts see the slump in Peloton stock as a buying opportunity. While calling the concerns over the voluntary recall “overblown” Baird analyst Jonathan Komp issued a bullish note on the stock with a $175 target price.

“Given any Tread/Tread + sales disruption should prove temporary and demand indicators for Bike/Bike + remain strong, we see a positive trading opportunity relative to recent negative trading action (tied to Tread uncertainty and generally lower sentiment for other technology and ‘stay at home’ plays) and would buy ahead of tomorrow’s earnings report,” said Komp.

CFRA analyst Camilla Yanushevsky also does not sees much impact from the recall. While from a PR perspective we think the voluntary recall is a few weeks late, we don’t see it materially impacting PTON’s growth story,” she said in a note while maintaining a buy rating and $170 target price on the company.

Headwinds for Peloton stock

Peloton stock has been facings several headwinds. On a macro level, investors have exited growth names including the “stay at home” stocks as the US economy reopens. This has led to a fall in names like Peloton. The rise in bond yields has not helped matters for Peloton which remains a play on future earnings that are less valuable now with rising rates.

On a company-specific level, Peloton has been facing supply chain issues that have weighed heavy on the stock. The news of the recall has only dampened the sentiments and would hurt the brand image of the fitness equipment maker.

Peloton earnings

Peloton would release the earnings today and analysts polled by TIKR expect the company’s revenues to rise 114% in the quarter to $1.12 billion. The company’s revenues have been growing at a fast pace and increased 128% and 234% respectively in the previous two quarters. However, analysts expect sales growth to slow down over the next three quarters as the demand growth for home fitness equipment is forecasted to come down amid the reopening of the economy.

As more people get vaccinated against the coronavirus, we could see a resumption of outdoor activities including gyms. Analysts expect Peloton to post an adjusted loss per share of $0.08 in the quarter. The financial impact on the recall would reflect in the current quarter.

Meanwhile, more than the earnings and the financials, Peloton management would face a lot of questions on the safety recall during the earnings call today.

Should you buy Peloton stock now?

The safety recall would leave a dent in the Peloton brand. However, the company has gone ahead for a voluntary recall albeit a bit delayed instead of it being pushed by the regulators to do so. The current fall in Peloton stock might be an opportunity for long-term investors to take positions in the company.

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Mohit Oberoi is a freelance finance writer based in India. he has completed his MBA with finance as majors and also holds a CFA charter. He has over 13 years of experience in financial markets. He has been writing extensively on global markets for the last six years and has written over 6,500 articles. He mainly covers metals, electric vehicles, asset managers, and other macroeconomic news. He also loves writing on personal finance and topics related to valuation.