Peloton shares skidded 6.6% Tuesday after a Citron Research short-seller note pointed to "clear flaws" in the exercise company's business model and an "overly promotional" management team that is "trying to justify an unrealistic valuation."
The report also reiterates points made by other short sellers of Peloton, including comparisons to GoPro and Fitbit, the track record of fitness products in the marketplace and dependence on "spin class trend and fitness fads."
Citron gives credit to Peloton for creating a product that incorporates interactive classes into its hardware but notes that the company has not innovated its product "in a meaningful way since the bike's introduction."
Competitors are starting to catch up and create similar products that are more affordable, Citron warns, including spin cycles with swivel screens, open platforms and iPad attachments. While Peloton has spent hundreds of millions on marketing that has mostly targeted high-income customers, Peloton hardware sales could start to slow as lower-priced alternatives move in, the note said.
Peloton cycles start at $2,245 and digital memberships start at $12.99 a month.
Emerging competition is also using Peloton's digital app to their advantage by selling iPad or iPhone attachments that can be used on less expensive cycles but still utilize Peloton's digital platform.
Citron said that "unless Peloton invents a piece of equipment that works out for you" the stock is going to $5 in 2020. This would put the company at a market cap somewhere between $1 billion to $2 billion. Peloton had a market cap of $9.2 billion on Tuesday and the average target price of analysts covering the stock is $33.10, according to FactSet.
The note also follows a Peloton holiday ad that went viral last week, receiving criticism from many. Others defended the ad arguing how motivating the company's classes and community can be.
Disclosure: CNBC parent Comcast-NBCUniversal is an investor in Peloton.
Correction: This story was revised to correct that Peloton's new app-only fee as of last week is $12.99 a month.