What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing with global economies reopening after the pandemic. The biggest question on a lot of investors, minds is what the new normal will look like. Coveted beneficiaries such as zoom and teledoc saw their businesses boom over the past year, along with their share prices, but as people gradually return back to a normal life. There's a big question mark as to how sustainable the success will be.

We recently received a new data point that paints a very bleak picture for the pandemic. Winners. Peloton is a new york-based exercise, equipment maker, their flagship, stationary bicycle and treadmill products are widely considered to be among the best on the market. They've become quite popular among affluent consumers who can afford to stomach their four figure price tags.

When the pandemic hit in 2020, they were perfectly positioned to benefit with gyms shut down. Millions of people wanted to buy home exercise equipment to prevent weight gain while they work from home. Unsurprisingly, peloton was one of the best performing stocks of 2020. at their peak on december 21st.

They reached 162 dollars per share, more than 450 percent higher than their ipo valuation of 29 per share one year prior and their share price performance appeared to be backed up by solid fundamentals. In the first quarter of 2021, they reported 1.2 billion dollars of revenue. That's more than one billion dollars above the roughly 200 million dollars of quarterly revenue that they are making in 2019.. This chart was generated by our website wallstreetmillennial.com, which is one of the most comprehensive free online resources for viewing historical company data.

The link is in the description below and now back to peloton. Everything seemed to be going well for the company. The appreciation of the share price allowed founder and ceo john foley to claim billionaire status, but it appears that their success may have been built on a house of cards on friday november. 5Th peloton shares nosedived 35 after reporting.

A disastrous earnings result for the three months ended september 30th. They lost 1.25 per share. This was worse than analyst expectations of one dollar and seven cents, but this wasn't even the worst part. They revised their full year revenue guidance to 4.6 billion dollars, which is almost 1 billion less than their previous guidance of 5.4 billion.

This is only 15 higher than their previous year's revenue of 4 billion. Investors are willing to tolerate some net losses when a company is in hyper growth mode, but if growth starts slowing down before you can achieve profitability, your stock will be crushed like a souffle. Under a sledgehammer - and this is exactly what happened to peloton, so how did this happen? How did one of wall street's darlings of the pandemic era see its business and stock price deteriorate so fast to understand this we'll have to look at their growth during the pandemic and why it was probably never sustainable. Peloton's products are quite expensive.

Their treadmills cost. Two thousand five hundred dollars to three thousand dollars and their stationary bikes all cost. Well over a thousand dollars. Every peloton device comes with a mounted touchscreen display to get the full experience of the product.

You need to pay a monthly subscription fee of 39 per month to access their virtual workout sessions. If you advertise the cost of a 2500 treadmill over 5 years and add the 39 monthly subscription cost. This gets you an equivalent monthly expense of 80 for comparison. A membership to planet fitness only costs about 10 dollars per month and offers a lot more equipment than a single treadmill.

So obviously peloton caters to a niche audience of fitness enthusiasts, who are willing and able to afford such an expensive home workout solution. But when the pandemic hit in 2020, gyms were forced to close down with no other options. Many people bit the bullet and shelled out a couple thousand dollars for their peloton machines. Unsurprisingly, peloton's revenues exploded their sales of connected fitness products which are their stationary bikes and treadmills.

Increased 99 in fiscal 2020. peloton has a weird fiscal year, so fiscal 2020 is at 12 months, ended june 30th. 2020.. Their subscription revenue also doubled, as they had a greater installed base of users to buy their fitness class subscriptions for fiscal 2021.

Their revenue continued to accelerate with connected fitness products, increasing 115 percent and their subscription revenue increasing 140. But despite their impressive revenue, growth, their operating losses also exploded to negative 187 million dollars. They claimed that the business would be highly profitable at scale and their losses were a function of investing in their studios and technology. While this was true to some extent, they were also burning hundreds of millions of dollars a year on sales and marketing.

Almost any brand can grow its sales if they throw enough commercials on the airwaves. But if there's not enough end demand from consumers, the sales will dry up as soon as they decrease their marketing budget, but wall street was too enamored by the growth to ask critical questions about how sustainable their growth was. So wall street bid up the stock to an almost 50 billion valuation, thinking that the growth would continue and they'd eventually become profitable in 2021, gyms started gradually reopening around the world real gyms offer a wide range of equipment and a chance to socialize with other people. Something a peloton home workout doesn't offer by the summer of 2021.

Things were getting desperate for peloton demand for their products was rapidly evaporating and their full guidance of 5.4 billion dollars in sales now seemed like a pipe dream in a desperate attempt to increase their sales. They cut the price of their flagship, stationary bike by four hundred dollars to one thousand four hundred ninety five dollars. This came less than a year after they cut their price to one thousand eight hundred. Ninety five dollars from its initial price of two thousand two hundred forty five.

That means they cut the price by more than one third in less than one year. This is obviously not a good sign, but even this extreme price cut was not enough to offset the evaporation of consumer demand. After the reopening for the three months ended september 30th. 2021.

Their revenue from connected fitness products decreased by 17 percent. Their subscription revenue continued to grow strongly at 94, but connected fitness products is a leading indicator of subscription revenue. So we will likely see a major deceleration in subscription growth in the coming quarters. Peloton also started incinerating cash at an alarming rate.

Their operating loss for the quarter of 360 million dollars was almost double their operating losses from the entire previous year and on closer inspection. Their 17 decline in connected fitness product sales is actually even worse than it initially appears. Much of their net. Losses can be attributed to their sales and marketing expense, which increased 148 to 284 million dollars for the quarter.

When they saw demand decrease for their products, they desperately did everything they could to boost sales and meet wall street's expectations. This meant spending hundreds of millions of dollars to blanket the airways with their ads. If you look at peloton's youtube page, their most viewed, video has more than 12 million views, but it only has 771 likes. They also turned off comments for the video the low like to view ratio indicates that they paid youtube to promote this video.

Also 27 of the ratings were dislikes, which is pretty bad for comparison. Gymshark's top viewed, video has a like ratio of almost 99 percent. That's because gymshark partners with influencers and athletes who are already popular this makes consumers feel a greater connection to the brand in comparison. Peloton makes traditional ads with nameless actors.

Their generic ad strategy lacks innovation and limits their potential to attract new customers, regardless of how much money they spend. This was painfully obvious in their 17 decline in connected fitness product sales, despite cutting prices and more than doubling marketing spend peloton, wasn't even able to make net profits when they are selling their bikes for 2 245 dollars each now that the price has been dropped to 14.95, their path to profitability has become even more uncertain. Their one possible saving grades is subscription revenue after covering the fixed cost of producing the workout classes in their studios. Almost 100 percent of their revenue from the 39 subscription payments goes to the bottom line.

The idea is that, once they achieve scale, they'll become extremely profitable, because they'll have so many subscribers for their fitness classes, but with their bike sales falling their ability to sell subscriptions will greatly diminish. Furthermore, a lot of people who bought peltons during the pandemic will probably end up cancelling their subscriptions eventually because they can now go back to the gym. Remember that their 39 a month price is more expensive than most gym. Memberships.

Peloton makes a premium product that's attractive to a small subset of wealthy customers. They got a one-time benefit from the pandemic, which allowed their valuation to reach close to 50 billion dollars. Investors were overly optimistic and thought their growth could last forever, but it now looks that they might go back to being a niche company while peloton is arguably the worst example in this regard. Other coveted beneficiaries are now facing the same problem.

Zoom communications is down more than 50 from its all-time highs. Vaccine maker moderna has also been cut in half, while these companies have great technology, it's pretty clear that their growth will moderate and might even turn negative over the next couple years. Alright guys that wraps it up for this video, what do you think about peloton? Do you think they can make a comeback? Let us know in the comments section below, as always. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.