Peloton's Safety Issues: What Investors Need To Know

Peloton Interactive Inc PTON shares traded lower by 9.5% on Monday after one regulator called for a large-scale product recall due to safety concerns.

What Happened? Over the weekend, the U.S. Consumer Product Safety Commission (CPSC) issued a warning related to Peloton’s Tread+ machines following what it claims are multiple incidents involving small children and pets being injured under the machines.

The CPSC said Peloton Tread+ users should stop using the machines if children or small children are in the area or lock the door when the machine is in use. When the machine is not in use, the CPSC recommends users unplug it and store it out of the reach of children.

Peloton has since issued a statement disputing the accuracy of the CPSC’s claims.

“There is no reason to stop using the Tread+, as long as all warnings and safety instructions are followed,” Peloton said in a press release.

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Why It’s Important: Peloton claims it has no intention of recalling the Tread+, and Bank of America analyst Justin Post said the CPSC can’t unilaterally issue a product recall without the company’s cooperation unless the agency sues to force the issue.

Meanwhile, Peloton said it's working on adding a software-enabled backup access code for the Tread+ to provide another layer of safety protection.

The CPSC said treadmills are inherently dangerous machines and noted that there were 17 deaths related to treadmill use from 2018 to 2020.

Post said Peloton should be able to manage even a worst-case scenario of a total Tread+ recall, which appears unlikely at this point.

“The new, lower-priced, Tread is launching in the US in May, and in FY22, we expect Tread sales be a much bigger driver of the stock than Tread+,” Post wrote in a note.

Post said the biggest risks for Peloton investors at this point are the potential for costs associated with additional safety features and damage to Peloton’s brand from the negative safety headlines.

In the long-term, Post remains bullish on the Peloton growth story. Bank of America reiterated its Buy rating for Peloton but cut its price target from $175 to $150.

Benzinga’s Take: If Peloton believed the safety issues were bad enough to put the company at legal risk, they would likely not have hesitated to recall the Tread+. For now, it appears the issues the CPSC pointed out are manageable, but investors should watch out for any additional safety issues with the new Tread that is launching next month.