Peloton Thriller Will Keep on Cycling

Peloton has gone from comedic television to action-packed thriller seemingly overnight. In the past two years or so we had America’s pandemic darling next door introducing itself as a likable protagonist. Then came the ominous warning signs, ignored by said investor darling. The denouement initially looked bleak: As of Friday’s close, Peloton had shed more than 85% of its market value from last January’s peak as more recent results showed growth was beginning to slow.

Things now look even worse: On Tuesday, Peloton said its digital subscribers—a primary lead generation channel for its business—fell nearly 3% sequentially, worse than Wall Street’s estimates. While the company chalked that up to a free trial ending, guidance for connected fitness subscribers for the remainder of the year also came in below the expectations. All told, for the year ending June 30, 2022, Peloton’s revenue forecast came in nearly 9% below what Wall Street was modeling.

Peloton also said Tuesday that it was starting a major cost-cutting initiative in an effort to take its business from a growth phase to one of consistent profitability. To do this, the company said it expects to achieve at least $800 million in annual run-rate cost savings and will reduce planned capital expenditures in 2022 by about $150 million. It plans to cut about 20% of its corporate head count.

Could there be further plot twists? On Friday, reports from The Wall Street Journal and the Financial Times that potential suitors such as Amazon.com and Nike were circling Peloton had fans believing quick and easy redemption could be right around the corner. Wall Street analysts went wild over the weekend, weighing in on every conceivable suitor and respective rationale. Peloton’s shares rose more than 20% Monday on the deal speculation, but much of this might have been short covering. As of mid-January, FactSet shows Peloton’s short interest was 12% of its free float.

At this point, a subscription to the Peloton drama might be a better investment than the stock itself. Mr. Foley said in an interview with the Journal that the company is open to exploring any opportunity that could create value for shareholders—important as Peloton is a controlled company and therefore would need the buy-in of Mr. Foley and other insiders to sell itself. But a management change—and the appointment of subscription dynamo Mr. McCarthy in particular—coupled with a clear cost-cutting plan seem to indicate Peloton is focused on executing an independent future.

It will have its work cut out for it. Peloton said on Tuesday’s earnings call that its updated guidance was based on extrapolating trends seen in the first half of its fiscal year. Positively, it is clear that Peloton’s future is as a subscription business. Its loyal connected fitness subscribers are unequivocally Peloton’s most attractive asset to any would-be buyer. The company also said Tuesday that it is winding down a domestic manufacturing build-out, admitting it overinvested in certain areas. That is an understatement: BMO analyst Simeon Siegel said in a note Tuesday Peloton’s estimated annual cost savings boil down to about the amount it grew labor, technology and acquisition expenses since Covid-19.

For anyone still hoping for a near-term buyout, it is important to note that neither the Journal nor the Financial Times reported any suitor has had actual talks with Peloton, suggesting the reported interest was still in the very early stages.

To get saved, Peloton first needs to show it can save itself.

Write to Laura Forman at [email protected]