What Is Going On With Peloton?

January 19, 2022

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Hey Friends,

Peloton was one of the biggest winners from the COVID-19 pandemic.

Their average member went from working out 11 times per month to 26 times per month. Their connected subscriber base quadrupled from 563,000 members in Q1 2020 to over 2.3 million today. Their quarterly revenue went from $228 million to over $1.2 billion, and most importantly, their stock price was up 450% in 2020 alone.

But times change, and with the leading digital fitness equipment & media company struggling to transition back into a post-COVID-19 world, Peloton has seen its market capitalization plummet back to pre-pandemic levels.

Peloton Market Capitalization (January)

  • 2020: $8 billion

  • 2021: $46 billion

  • 2022: $10 billion

For context, Peloton’s stock has dropped 80% over the last year, from $150/share to $30/share, and is now roughly flat to its 2019 IPO price of $29/share.

So rather than sit back and watch its business get destroyed, CNBC is reporting that Peloton has hired management consulting firm McKinsey & Co. to review its cost structure, potentially eliminate jobs, and close stores.

Here’s a summary from CNBC’s Lauren Thomas:

Peloton is working with management consulting group McKinsey & Co. to review its cost structure and potentially eliminate some jobs, CNBC has learned.

The possible job cuts were discussed in a recent call with members of Peloton’s management team, according to a recording obtained by CNBC. The apparel division, which has seen particularly weak sales, is one area that could be targeted. The company doesn’t disclose revenue from its apparel business.

Peloton is also considering asking employees at its brick-and-mortar retail stores to take customer service calls during less busy times, according to the call. At one point, a Peloton executive on the call said that 15 stores are “on the cut line.” Peloton operated 123 showrooms as of June 30, in the U.S., Canada, the U.K. and Germany.

CNBC also viewed more than a dozen messages from an internal app for employees, as well as Slack messages, where workers have been discussing the expected job cuts and Peloton’s plummeting stock price.

“Morale is at an all-time low,” said one employee, who requested anonymity to be able to speak freely to CNBC. “The company is spinning out so fast.”

Lauren also touched on Peloton’s hiring freeze & price hikes:

In November, Peloton implemented a hiring freeze. It employed 6,743 people in the United States as of June 30, more than double the roughly 3,281 employees it counted a year earlier, according to annual filings.

At the end of this month, Peloton will begin tacking on hundreds of dollars in fees for delivery and assembly of its Bike and Tread products, citing historic levels of inflation and heightened supply chain costs. Previously, those fees were included in the price of the Bike and the Tread. That will bring the cost of the products to $1,745 from $1,495 and $2,845 from $2,495, respectively.

“Right now, people are raising prices. Ikea just raised prices. We want to go in the middle of the pack,” Dara Treseder, Peloton’s chief marketing and communications officer, said in a separate recorded meeting.

By asking future customers to take on shipping and setup costs, Peloton will save on those expenses, which have likely weighed even heavier on profits as the company’s sales slow.

The company has been posting losses and has said it doesn’t expect to be profitable – before interest, taxes, depreciation and amortization – until fiscal 2023.

In early November, the fitness company slashed its fiscal 2022 outlook, projecting revenue of between $4.4 billion and $4.8 billion, down from its prior estimates of $5.4 billion. It also cut expectations for subscribers to a range of 3.35 million to 3.45 million, down from 3.63 million.

In recent weeks, a number of analysts said they anticipate the company had a weaker holiday, which could prompt another cut to its annual guidance.

Now I think there are a few things to unpack here.

First, the optics probably aren’t great. Peloton CEO John Foley was in the news last month after he sold his $4.5 million Hamptons home and moved 15 minutes down the street to a $55 million waterfront estate.

I get it. Retail investors are losing money, and the company might now be firing employees and closing stores — some would say it’s poor taste to buy a $55 million house in a neighborhood that is famous for housing hedge fund billionaires like Ken Griffin and Jim Chanos while your employee & shareholder base is struggling.

But to play devil’s advocate, that’s how free-market capitalism works. John Foley built a big business, was rewarded with financial gain, and created over $9 billion in value for other people along the way (he owns less than 10% of the business).

I’m not saying I would do the same, but I understand both sides of the argument.

But when you put optics aside, you have to wonder how much longer this can go on.

Peloton clearly underestimated the impact that reopening the economy would have on its business. They have admitted that. But the root of most of their problems stems from heightened demand & increased investment, which can go both ways.

When Peloton went public in 2019 at $29/share and an $8.1 billion market cap, they had 1.4 million total members, did $915 million in annual sales, and recorded a net loss of $245 million.

Today, roughly 2 & 1/2 years later, the stock is at $30/share, has a market cap of $9.8 billion, and Peloton now has over 6 million total members, did $1 billion in quarterly sales multiple times last year, and recorded a net loss of $189 million in 2021.

There is nuance to this, of course. For example, Peloton invested hundreds of millions of dollars to strengthen its supply chain during COVID-19, but with demand and the pace of revenue growth dramatically slowing, most financial analysts are now concerned about when Peloton might see a return on that investment.

Here is what Credit Suisse said last month:

“Demand is coming in lower on all fronts leading us to wonder when we might see a return on all the capital they have deployed. Long term, the connected fitness opportunity could still be intact but the path to get there appears more difficult.”

Some of the public reaction is to be expected. Many people have claimed that a stationary bike with an iPad would never be successful, and with the stock down 80% from its 52-week high, they feel vindicated and have decided to celebrate.

Maybe it’s just the optimist in me, but I don’t believe this story is over.

Peloton has grown revenue more than 100% year-over-year for 6+ years now. They have millions of members that use their equipment 20x per month on average. Their monthly membership churn is under .75%, which is lower than mobile phone providers like AT&T, Verizon, Sprint, and T-Mobile, and they are investing heavily in the hospitality & corporate wellness space after their $420m acquisition of Precor.

My point is that there are still many good things happening at Peloton.

Now you guys know that this isn’t financial advice. I don’t personally own Peloton stock, and I don’t care if you buy it, short it, or use it to trade some exotic financial derivative — although I wouldn’t recommend that!

But I think this will be a fascinating story to follow over the next 12 to 24 months.

I have a general rule that I don’t bet against the future. Group workouts and in-person fitness will always be a thing. I genuinely believe that.

But the current shift to a digital world can’t be ignored either — we work online from home; we hang out with our friends online from home, and I believe much more than 6 million people will eventually use Peloton to work out online from home also.

The key will be seeing if Peloton can build a sustainable business off that thesis.

I hope everyone has a great day, and we’ll talk tomorrow.

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