Peloton (PTON  ) shares finished 9% lower after the company reported weaker than expected results followed by the company missing on the bottom-line and reporting higher costs than expected. Management also issued guidance that was below expectations and cut prices on its bikes that some are seeing as a sign of flagging demand. However, bulls believe that Peloton is simply focusing on its higher-margin subscription business and thus should be willing to sell its bikes at breakeven.

Overall, Peloton's miss and poor results are similar to many other stocks that were big winners during the pandemic. With most gyms closed at this time last year and many avoiding the gym even after it reopened due to masking and COVID risks, Peloton's bikes became a cult product and orders backed up for many months. Now, the company is dealing with the other side as it grapples with tougher comps and people returning to normal behavior. At the same time, it is a high multiple stock so must deliver consistent growth and margin expansion to justify its valuation.

Inside the Numbers

In its fiscal fourth quarter, Peloton reported a loss of $1.05 per share which was worse than expectations of $0.45 per share. Revenue beat at $937 million vs $927 million. However, the big surprise was the slowing of growth from last year when revenues topped $1 billion. Additionally, margins look to be under pressure as costs were higher than expected due to the treadmill recall, and it's cutting prices on its bikes by 20%. Further, the company gave some chilling warnings that could indicate the business may have peaked.

The company also said it expects more treadmills sales which have lower margins compared to bikes. Additionally, commodity pressures and freight prices are also compressing margins. Further, it plans to increase marketing which is worrisome as the company was able to get to $1 billion in revenue last quarter through simply "word of mouth".

Another concern is that many new companies have entered the home workout space such as Mirror, Hydrow, and Tonal in addition to gyms reopening and fitness classes resuming. This may have been one reason that the company's churn rate increased to 0.7% from 0.5% a year ago. Currently, the company has 2.33 million subscribers which is 114% higher than a year ago.

Average monthly workouts which some consider a leading indicator of churn also declined to 19.9 from 24.7, although the company attributed it to nicer weather and people going on vacation.

In its next quarter, Peloton issued a revenue forecast of $800 million due to issues with treadmill production and lower prices for its bikes. This fell short of analysts' consensus expectations of $1.01 billion. It also forecast 2.47 million connected fitness subscriptions and a churn rate of 0.85%.

Stock Price Outlook

Every few years, there is a new fitness fad that people become convinced is the next big thing. Peloton may be the most extreme example as its market cap reached $50 billion.

Given slowing revenues, lower margins, and increased competition, it's unlikely that Peloton's shares will ever reach these lofty levels. Investors should avoid the stock given that valuations remain extremely high, and leading indicators are already moving in the wrong direction.