Peloton share price: where next following product recall pressure?

Change of fortunes at Covid-19 winners Peloton

Peloton Interactive Inc (PTON:NASDAQ), the interactive fitness platform, has taken an abrupt u-turn from being one of the big winners from the Covid-19 lockdown to a business that seems a little uneasy at forecasting its own outlook.

Peloton acts in response to pressure

The tragic events that led to the death of a child and the injury of a number of other users of the company’s treadmills has prompted Peloton to issue a recall of the Tread and Tread+ machines. This has taken shares to levels that means that the company is now only worth half of what it was, at its peak, in January this year.

Initially, Peloton’s business model fitted in nicely to the idea that during lockdown, we could no longer move around outside, and gyms would be closed for an indefinite period. The company not only provided the hardware, but also the supporting software and programming that enabled customers to tune into fitness regimes offering a smooth transition from public to private areas.

Product warning

In April this year, Washington state's Consumer Product Safety Commission (CPSC) warned people to stop using the Tread model if they had children or pets. Initially Peloton resisted, telling customers the warning was ‘inaccurate and misleading’. Then a child, tragically, died and Peloton recalled all the Tread machines in the US and Tread+ in the UK.

Company safety announcement

On its US website, Peloton now has a ‘Product Safety Notice’ which references a loose touch screen and suggests that the product not be used until it is repaired or, if it is not wanted, be returned at the company’s expense for a full refund.

‘We are announcing an important safety update concerning the Peloton Tread. For Peloton members, this means they should stop using their Tread and ensure that no one else uses it because the touchscreen may become loose and fall off, posing a risk of injury. Peloton is working with the Office for Product Safety & Standards in relation to this matter. We are very sorry about this and are already developing a repair which we aim to make available soon’, reads the notice.

As at the time of writing there appears nothing addressing the issue, of which some have complained, where the rear of the treadmill is exposed, posing a threat to young children and pets.

Q3 earnings

At the company’s third quarter (Q3) earnings it may have come as a surprise to many that, having been pushed into action over the product safety issue, the company made no mention of the recall in the shareholder letter that was issued alongside the earnings release. It also failed to issue a statement about its outlook, instead preferring to tell investors that it intended to ‘offer revised full-year guidance during prepared remarks [at the] earnings conference call’.

So far as the response to the earnings was concerned it was a relief to many that it was strong enough to see a rebound in shares, but, as the below chart shows, this comes after considerable pressure in the stock price of Peloton.

Peloton share price: trading the chart

So, what happens now? From the pre-Covid-19 lows seen on the chart above, where shares saw support at the earlier initial public offering (IPO) price of $29, the appeal of the whole Peloton ‘experience’ saw demand lift-off at a startling rate, taking shares all the way up to a record $171 in January this year. The initial drop, earlier in 2021, was as a result of the announcement that Covid-19 vaccines were being shown to be working and it was clear that people wanted to get back out and into gyms. This gave rise to questions about the passing of peak demand for expensive home equipment and fitness classes.

However, this drop was to be overshadowed in April. That was when the Washington consumer group’s appeal to the company to withdraw its Tread machines can clearly be seen as a headwind to price action. The product recall then saw the steep drop, taking the share price down to a point where the company’s market capitalisation had shrunk by more than half from that January peak.

The relief rally from earnings, released on 6 May, is also clearly evident, but this is just a small retracement in what is a persuasive downtrend. For any confidence for a long-term recovery in prices, traders will be wanting to see a candle close above the $125 peak on 24 April. Until then the appetite for both the US and the UK to avoid another lockdown means that many will be wanting to return to group fitness sessions and, at best, row back on home-based fitness regimes.

Trading the retracement

To trade the retracement, the Fibonacci retracement tool would need to be placed over the recent high to the swing-low. This would give a price target of $95.38 at the 61.8% pull-back. A stop-loss would need to be placed below the Fib’s lower line at $77.00. There is, however, a longer-term retracement that may also apply by taking the Fibonacci retracement levels from the $125.00 highs from April. That would only apply, though, once that $106.00 level is surpassed.