On rare occasions, a publicly traded enterprise might skyrocket on happenstance, as was the case with home exercise equipment manufacturer Peloton Interactive (US:PTON).

Although the underlying industry has always commanded intrigue, PTON stock really came alive during the worst of the COVID-19 pandemic. Forced to quarantine amid a shutdown in non-essential activities, Peloton’s exercise bike offered a viable fitness platform.

Shares continued to rise toward the tail end of December 2020. On a weekly average basis, PTON stock once carried a per-share price tag of more than $160. Since then, however, shares began to decline – a quick drop followed by sideways trading during the summer of 2021. In hindsight, that was the time to exit. Once the calendar turned to the following November, circumstances became desperate at Peloton HQ.

Tragically, PTON stock suffered a devastating one-two punch: first, the Federal Reserve began reining in the monetary excess that characterized the post-COVID response, via raising the benchmark interest rate. Subsequently, the acceleration in borrowing costs led to corporate downsizing, which in turn reined in retail discretionary expenditures.

Second, societal fear of the SARS-CoV-2 virus began fading. Around the same time, government bodies around the world began reopening their economies. With people cooped up at home for so long, the last thing anyone wanted to do was to isolate even more. This framework translated to a reduced addressable market for Peloton, thereby hurting PTON stock.

Stated differently, COVID giveth and COVID taketh away. Moving forward, serious concerns exist about the home exercise specialist’s viability.

Red Flags Emerge for PTON Stock

On the surface, Peloton’s mixed bag fiscal fourth-quarter earnings report wouldn’t appear to warrant a plunge of more than 20% on the charts. While the company posted a loss per share of 68 cents – thus missing the mark against the consensus estimate of a loss of 38 cents – it did ring up sales of $642.1 million. Surprisingly, this haul beat the forecast of $639.9 million.

However, one of the main issues centered on the company’s product recall of its popular exercise bike. Issued on May 11 earlier this year, the concern was that the bike’s seat post assembly could break during use, posing fall and injury hazard to the user. During the Q4 earnings call, management admitted that the recall sparked more attrition (or churn to use the business lexicon) than it expected.

Adding to the jitters for PTON stock, Peloton ended Q4 with 3.08 million subscribers. While this figure represented a 4% year-over-year increase, it also slipped by 29,000 subs against Q3’s tally. Moreover, The Wall Street Journal noted that the fitness-bike manufacturer expects negative cash flow in the next two quarters. This disclosure comes amid management fighting against high inventory levels.

Still, CEO Barry McCarthy attempted to put a positive spin on the red ink. “I have never been more optimistic and excited about the future of the business. There is just an enormous disconnect between the stock price and the energy in the building.” That only served to further infuriate his critics.

Insiders and Institutions Disconnecting from Peloton

While optimism in the face of steep odds may be a noble attribute, it unfortunately clashes with the reality underlining PTON stock. It’s not just about poor investor sentiment. Rather, the people closest to the business – along with those with the greatest informational and financial resources – appear to have thrown in the towel.

According to data compiled in Fintel’s Insider Trading and Ownership Report, more than 700 insider sells have been recorded. The data tracks recent open market sales that were not part of an automatic trading plan. Recent divestures that occurred on Aug. 18 – and recorded Aug. 21 – represent the most recent exits. 

On the other side of the equation, Fintel notes that only 102 insider purchases have been recorded. Here, the most recent such buy occurred and was recorded on Nov. 18, 2021. Back then, shares traded for over $40 a pop. Given that PTON never regained any semblance of its former glory, it’s not shocking that insider buys completely dried up.

Posing just as big of a concern, Fintel’s screener for Options Flow – which filters for big block trades likely made by institutions – points to an overall pessimistic environment. On Tuesday, volume for sold $6.50 calls (which have a bearish implication) with an expiration date of Sept. 9, 2023 hit 4,793 contracts. While there was a countervailing bought call – with a strike price of $7.50 and a Sept. 22 expiry – the volume only came out to 592 contracts.

In fairness, activity erupted on Aug. 23 following Peloton’s earnings disclosure, which featured a wide mix of bullish and bearish tactics. Nevertheless, looking at options flow in totality, the overall picture among institutional traders is incredibly pessimistic.

Paying for the Hangover

Although PTON stock symbolized one of the big winners of the COVID-19 crisis, as the pandemic faded, it became one of its worst losers. Unfortunately, Peloton did not build enough of a cushion to absorb the hangover effect once the party came to a close.

To be sure, not all of Peloton’s woes can be blamed on management. With Americans’ credit card debt hitting over the $1 trillion level and major retailers reporting that their customers are feeling financial pressure, the company’s challenges are certainly not unique. However, the lack of distinction sadly does not make PTON stock a buy. Rather, investors may want to consider heading to the sidelines.