During the height of the COVID-19 pandemic, Peloton (PTON) could seemingly do no wrong. Following an eyebrow-raising commercial that became a pop culture meme, the home exercise bike manufacturer enjoyed blistering demand as the public health crisis forced virtually everyone to quarantine. With only limited social activities available, many consumers turned to Peloton to stay fit. Naturally, PTON stock blossomed.
However, the problem was that shares peaked around December 2020. Throughout the following year, PTON stock struggled to maintain traction. Unfortunately, booming inflation forced the Federal Reserve to implement an aggressively hawkish monetary policy. In turn, the rise in the benchmark interest rate saw Peloton stumble badly in 2022. At the same time, social normalization trends accelerated, meaning that consumers had more and cheaper fitness options.
Once commanding a triple-digit price tag, PTON stock is now trading for less than $6 per share. Even more challenging, the worse may be yet to come. On Wednesday, Peloton disclosed results for its fiscal fourth quarter. Surprisingly, the company posted revenue of $642.1 million, which while down from the year-ago quarter’s $678.7 million still topped expectations calling for $640.5 million.
However, the Associated Press reported that the number of members declined 5% to 6.5 million. Peloton President and CEO Barry McCarthy disclosed that issues related to the seat post recall announced in May contributed to the subscription decline. “An estimated 15,000 to 20,000 of our 2.2 million impacted members elected to pause their monthly subscriptions in Q4 pending the receipt of a replacement seat post,” he stated.
Adding to the misery, costs tied to the recall substantially exceeded initial expectations. Subsequently, Peloton lost $241.8 million or 68 cents per share. In contrast, analysts anticipated a loss of 45 cents per share. Given the broader framework of normalization trends and the broader consumer economy, it’s probably a good idea to reexamine exposure to PTON stock.
Institutional Traders May Have Been Caught Off Guard with PTON Stock
Because Peloton represented one of Wednesday’s market movers (though for dubious reasons), it wasn’t at all shocking to see PTON stock light up Barchart’s screener for unusual stock options volume. Following the Aug. 23 close, total options volume reached 193,723 contracts against open interest of 751,622. Further, the delta between the Wednesday session volume and the trailing one-month average metric came out to 450.60%.
Drilling down, call volume hit 104,685 contracts while put volume clocked in at 89,038 contracts. This pairing yielded a put/call volume ratio of 0.85. Regarding open interest, this ratio sits at 0.51. However, it’s what happened a day prior to the earnings disclosure that may be the central theme of PTON stock moving forward.
Looking at Fintel’s options flow screener – which focuses on big block trades likely made by institutions – traders began selling $5 puts (via multi-sweep transactions) with an expiration date of Sept. 15, 2023. At the time, PTON stock closed at $6.99 in the open market.
Generally speaking, selling puts reflects a neutral-to-bullish outlook on the underlying security. Basically, the trader is gambling that the stock won’t drop below the strike price. Otherwise, the trader would be obligated to buy the security at the strike price when the countervailing party exercises the contract.
At $6.99, PTON stock traders enjoyed a roughly 40% cushion. Unfortunately, at $5.41 following the midweek session, that cushion now has dropped to around 8%. Interestingly, institutional trading lit up the board once Peloton revealed its fiscal Q4 report. The frenetic trading – which involved buying $5 puts and selling $6.50 calls under the Aug. 25 expiration date – may suggest post-earnings mitigation activity.
While it’s difficult to say with absolute authority, the institutional traders may have been caught off guard, expecting Peloton to deliver a more positive report. Aside from the troubles associated with the product recall, the company did ring up better-than-expected sales.
Still, with dark clouds forming over the consumer economy, retail investors may want to head for the sidelines.
Fundamentals Don’t Support Peloton’s Long-Shot Recovery Effort
Although some encouraging data materialized from Peloton’s fiscal Q4, it may be too little, too late. Even if the company fired on all cylinders, the broader headwind of significant vulnerabilities in the consumer economy will likely stymie PTON stock.
First, consumers now have plenty of options with COVID-19 fears having faded into the background. With financial pressures piling up – as evidenced by consumer debt hitting a record $16 trillion last year – many households are simply not in a position to buy expensive exercise bikes that may end up collecting dust several months later.
Second, while retail spending may be robust, cutbacks in discretionary purchases may be coming soon. Worryingly, credit card debt alone exceeded the $1 trillion mark. With mass layoffs always a threat during slowing economic cycles, consumers will almost surely be extra mindful of their expenditures. Unfortunately, such a cautious outlook doesn’t bode well for PTON stock.
Ultimately, investors need to recognize Peloton as a significantly vulnerable enterprise. As a result, it may be best to stay away.
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