Why Peloton Stock Continues to Drop

What happened

Shares of Peloton Interactive (NASDAQ: PTON) continued a slide today that has clipped about 13% off its stock price in the last week. Shares dropped another 4% as of 11:30 a.m. EDT Wednesday, as the company continues to push back against calls to recall its treadmills over a safety question.

So what

Peloton became a stock market favorite as a stay-at-home play during the pandemic with consumer demand exploding for its indoor exercise bikes and treadmills along with an online subscription trainer app. The company introduced its first treadmills in 2018, but this March Peloton CEO John Foley sent an email to owners of the company's Tread+ after an accident involving the equipment resulted in a child's death. Foley stressed the safety warnings that come with the equipment, including keeping children and pets away from the equipment, and removing the safety key when not in use.

man at home on Peloton treadmill

Image source: Peloton Interactive.

But over this past weekend, the Consumer Product Safety Commission (CPSC) advised people with young kids or pets to stop using the equipment. And on Monday, pressure on the company mounted when the chairwoman of a House consumer-protection subcommittee called on the company to recall its treadmills.

Now what

The company is not backing down, however. Peloton initially called the CPSC advisory inaccurate and misleading. And Foley said in a letter to customers that the company didn't plan to recall or stop selling the equipment.

Investors, however, aren't keen to be in the middle of a spat between the company and federal agencies and politicians. It's too early to know how it will pan out, or whether other treadmill manufacturers will also be drawn in. But there is reputation risk, and with a high growth stock that trades at a lofty price-to-earnings ratio above 150, some investors would rather watch it play out from the sidelines.

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Howard Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Peloton Interactive. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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