Peloton treadmill recall causes Bank of America to slash rating on the stock

Brian Sozzi

Wall Street is wasting very little time fine-tuning their thinking on Peloton's stock in the wake of a safety related recall of the company's popular treadmill.

Bank of America analyst Justin Post slashed his rating on Peloton's stock to Neutral from Buy in midday trading on Wednesday. Post took his price target down to $100 from $150.

"We think tread overhang will impact the Street's long-term subscriber growth outlook and, therefore, the stock's multiple," Post wrote in a research note obtained by Yahoo Finance.

Post continued, "Our biggest concern on the news is not the potential loss of Tread+ subscribers (about 5% of total, but we think many will keep their Tread+ units), but the potential impact on the launch of the new lower-priced Tread. We had anticipated the new tread would be a significant growth driver in fiscal year 2022 (June year-end), driving upside to Street revenue and subscriber estimates. We think with recent news, Peloton will likely delay the lower-priced tread launch in the U.S. to calendar third quarter. We estimated 600k new tread sales for FY2022, which was likely well above Street projections. With over 125k estimated TTD Tread+ units sold, a recall or in-home software/hardware adjustment will be a financial headwind for Peloton, but we think it will be manageable. The bigger risk we see is how negative publicity will impact lower-priced Tread sales (we think the launch is now more likely in the fall ahead of the holiday season)."

Peloton CEO John Foley said Wednesday that the connected fitness company's voluntary decision to recall its Tread+ and Tread treadmills after one child's death and other reports of injuries was the "right thing to do" for the company's members and their families.

The Consumer Product Safety Commission (CPSC) announced that Peloton was recalling the $4,295 Tread+ and the $2,495 tread, noting that people who bought either piece of equipment should stop using it immediately and contact the company for a full refund.

The company's stock finished the trading session down 14.6% to $82.62. Peloton shares were also the top-trending ticker on the Yahoo Finance platform by the sound of the closing bell.

"We view this as another sign that Peloton’s voice and platform grew faster than its business, and it is still working to grow into its fame," BMO Capital Markets analyst Simeon Siegel wrote in a research note soon after the recall.

Added Siegel, "With a still ~$30 billion market cap vs. consensus-expected ~$4.1 billion of FY21 revenues, Peloton's market value looms much larger than its expected results and we believe one can argue more of Peloton's market value has been created by its marketing department than by its engineers or instructors. Recommend the bike, worried about shares."

Siegel maintained his Underperform rating on Peloton with a $45.00 price target.

Inside the recall

In its release, the CPSC noted that in addition to a child's death there were 70 "incidents" related to the treadmill. The agency previously issued a stark warning about the Tread+ on April 17, noting the death and "multiple incidents of small children and a pet" being injured beneath the machines. In a tweet warning users to "stop using the Tread+," the CSPC posted a disturbing video of a child being sucked under the machine while playing with a ball.

That warning prompted a fiery response from Foley, who said the company had "no intention" of recalling the Tread+. In a statement on Wednesday, Foley acknowledged that response was a "mistake."

The CSPC said Wednesday that Peloton is currently working on hardware modifications for the Tread+. The cheaper Tread was part of a limited, invitation-only release from November 2020 to this past March, and the CSPC said Peloton is working on a repair to be issued in the coming weeks.

Peloton itself raised concerns about the Tread+ in March, when Foley posted a letter on the company's website noting the fatal accident involving a child and the company's treadmill.

"While we are aware of only a small handful of incidents involving the Tread+ where children have been hurt, each one is devastating to all of us at Peloton, and our hearts go out to the families involved," he wrote.

While Peloton doesn't disclose its sales figures for treadmills, they are seen as a key ingredient of diversifying the revenue base beyond bikes and widening the company's total addressable market.

Erin Fuchs, deputy managing editor for Yahoo Finance, contributed to this story.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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