Tough Going for Peloton

Peloton wasn’t alone. A whole class of ‘pandemic darlings’ were being put through their paces, as life looks set for a return to normality. Netflix, Zoom, DocuSign, Etsy were all down in what was described as a stock market meltdown, as some 42% of stocks on the Nasdaq exchange saw their 52-week highs cut by half. The Nasdaq 100 Stock Index has lost 10% this month, recalling memories of 2020 and 2008.

So, is this just about the market or does Peloton have its own particular problems? Launched 10 years ago, it had a stellar 2020, when demand for its exercise bikes surged when gyms closed. Last year, with a gradual return to a semblance of normality, the correction was perhaps bound to come, though few expected a 76% loss. Average monthly workouts per connected subscription have been slowing recently, since hitting a peak in 3Q 2021, though the membership of more than 2.5 million remains impressive.

Problems continue to plague Peloton

Problems have continued to plague Peloton. This week, founder and CEO John Foley said the company was “resetting” production levels and cutting operational costs, possibly including headcount, triggering a hard sell-off that cut almost $2.5bn from Peloton’s market value. Compounding Peloton’s woes were media reports that the company was temporarily halting production, though these were denied. And, in apparent confirmation of Peloton’s problems, came news of the appointment of management consultant McKinsey & Co.

Is Peloton downsizing? What are the problems? Analysts have pointed to Peloton’s investment strategy, set in response to the surge in demand in 2020, when Peloton struggled to meet demand. Since then, the strategy has been to boost capacity, making significant investments in factories in Taiwan, North Carolina and Ohio. With this expansion also came increased staff costs, on top of an already healthy marketing spend, all candidates for McKinsey cutbacks. It seems Foley has over-extended, and activist investors have already called for his resignation.

Multi-year returns substantial

We should not lose sight of the positives. Firstly, the multi-year returns are still substantial. Peloton will be reporting its earnings on 8 February, but the news is expected to be good. Connected fitness subscriptions remain solid, though slightly down at 2.8 million; revenue is expected to hit its previous forecast of $1.1–1.2bn; while its previously forecast EBITDA loss of $325–350m is expected instead to be only some $270m.

Peloton is recognised as the sector’s market leader with a fitness product that is well ahead of the competition. However, its high cost (the base price of the Peloton Bike is $1,495, while membership is around $40/month) combined with the macro picture of slowing demand amid a general return to gyms, means 2022 is going to be challenging.

Peloton has been through a punishing year but we can expect it to come through leaner and fitter, and with a broader product range, such as possibly a rowing machine. Bearing in mind that connected fitness as a sector is in its infancy, this stock may may well be a candidate for a strong recovery, though speed of recovery is another matter.

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