Peloton Stock Is The One To Watch In May, Here's Why

Shares of Peloton PTON have been trading in a volatile manner recently as the bulls struggle to maintain positive momentum amid negative headlines surrounding the company. The Peloton stock has performed extremely well in 2020 as it went from about $29 per share at the year open to close above the $150 mark.

Tread Recall

Peloton announced they are recalling their Tread+ and Tread Treadmill products after several safety issues, multiple injuries, and now the death of a six-year-old child. The US Consumer Product Safety Commission (CPSC) issued an urgent warning for owners to stop using the Peloton treadmills at once. In March, the company rejected the idea of recalling its products even after the tragic death of a six-year-old child, who was pulled underneath the rear of the treadmill.

The company believed a warning to keep children away from the equipment seemed to be sufficient. Not long after that, Peloton's CEO John Foley admitted the company made a mistake in not recalling the machines sooner. It is quite unbelievable that Mr. Foley went out and called this one of a "small handful" of incidents in which children have been hurt on the exercise equipment. 

After a while, it seemed like he finally wrapped his head around what happened and took full responsibility for the tragedy the company's product caused. 

"I want to be clear, Peloton made a mistake in our initial response to the Consumer Product Safety Commission's request that we recall the Tread+," Foley said in a statement. "We should have engaged more productively with them from the outset. For that, I apologize." 

As if we needed more reasons for recalling the Tread+ and Peloton Tread, another safety risk was the display console falling off. The US Consumer Product Safety Commission (CPSC) explained that Peloton had voluntarily come to this decision. 

Robert Adler, Acting Chairman of the CPSC, said: "The agreement between CPSC and Peloton is the result of weeks of intense negotiation and effort, culminating in a cooperative agreement that I believe serves the best interests of Peloton and of consumers.”

Since the company and the watchdog managed to come to this agreement, the firm must stop selling the machines in the US, and the customers have the right to return the products and get a full refund.

As already mentioned, the touchscreen on the Tread can detach and fall, according to the CPSC. The company received 72 reports of minor injuries such as cuts, bruises, and abrasions in the UK and Canada. 

The CBC warned the Tread+ carries a more serious hazard because "adult users, children, pets and objects can be pulled underneath the rear of the treadmill, posing a risk of injury or death". The machine needs a higher ground clearance than typical treadmills because of the motor type used in the Tread+. 

The PA news agency said a Peloton spokesman confirmed that the recall also related to the Tread in the UK. The company promised that it is currently working on a repair to be offered to Tread owners in the coming weeks. However, no repairs outside the US were mentioned.

During the COVID-19 pandemic, the fitness company appealed to customers offering premium options of exercising from home with live video from trainers, since gyms were forced to close. It is not surprising that the shares dropped more than 14% after the recall announcement. 

The announcement sent Peloton stock sharply lower as investors are concerned that the recall will negatively impact the company’s financial performance, while it may also push back the launch of new products. This is why Peloton is definitely one of the stocks to watch in May as the volatile price action tends to offer opportunities on both sides.

Q3 Earnings Performance

Earlier this month, Peloton announced the third-quarter results. The company reported a loss of $0.03 per share on sales of $1.26 billion. This is better than the analysts’ estimates of a loss of 11 cents on sales of $1.11 billion. 

Peloton said that the number of Connected Fitness subscriptions rose 135% year-over-year to 2.08 million. Digital-only subscribers exploded more than 400% to 891,000. On the guidance front, the company said it expects Q4 sales of $915 million while for the full year it is projecting revenues in a range of $4.0 billion to $4.075 billion.

“Over the past year we have invested aggressively in the continued expansion of our supply chain, and you’ll recall that in last quarter’s shareholder letter we disclosed incremental investments in expedited shipping to reduce the wait times for our products. Today we’re pleased to say that these investments have yielded significant improvements for our Members, as average wait times for our original Bike are now back to pre-COVID-19 levels,” the company said in a press release.

Both the Q4 and full-year guidance fell short of analysts’ estimates to put additional pressure on Peloton stock, which is down over 3% in May after losing 12.5% in April. The Peloton stock is yet to close in the green on a monthly basis in 2021.

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