Peloton ended 2020 on top. Its own supply chain issues had presented a hurdle — but if anything, these were side effects of the company’s own stratospheric successes. It simply couldn’t keep up with demand, one of the better problems to have as a business on the rise. Always leave them wanting more, as P.T. Barnum may or may not have once said.
The connected fitness firm had already developed a kind of cultish following in various upscale circles, well before most of us had an inkling of knowledge about novel coronaviruses. But the pandemic accelerated Peloton’s success beyond what most could have reasonably predicted. Gyms across the world began to shut down, and with everyone stuck inside, home fitness provided a solution. Peloton, offering some extra connectedness in a socially distanced world, was a hit.
Investors bought in, sending Peloton’s share from around $30 at the start of 2020 to above $160 in the closing days of the year. In 2021, however, things hit the skids, with Peloton falling to around $36 by the end of last year.
Those declines have continued. Last week, things truly hit the wall at Peloton. A continued erosion in demand as gyms began to reopen has seemingly put the company on red alert. With hundreds of millions spent on manufacturing to meet a spike in demand, Peloton’s top brass appear to have seen the pandemic as less of a one-in-a-100-year-event and more the beginnings of something larger.
Following reports that the company had employed consulting firm McKinsey to facilitate restructuring and layoffs, Peloton lost ground. Further reports — partially denied by CEO John Foley — suggested the company was halting production across its line of treadmills and stationary bikes, and were more bad news for the value of the company.
And this morning, Jason Aintabi, the chief investment officer of activist investor Blackwells Capital, issued a letter to Peloton’s directors, calling for Foley’s immediate termination and imploring the board to consider selling Peloton.
We believe the pandemic offered Peloton a tremendous and unexpected opportunity to accelerate consumer adoption of its category-defining products and drive performance of the business and value for shareholders. With the stock now trading below the IPO price, and down more than 80% from its high, it is clear that the Company, the executives and the Board have squandered this opportunity.
Remarkably, the Company is on worse footing today than it was prior to the pandemic, with high fixed costs, excessive inventory, a listless strategy, dispirited employees and thousands of disgruntled shareholders. And no wonder, the latter, given that Peloton underperformed every other company in the Nasdaq 100 over the last twelve months.
The letter concludes, “The ride for Mr. Foley is over. This Board must now independently chart a new path for Peloton.”
Blackwells, which acquired a significant stake of less than 5% of the company, per The Wall Street Journal, cites a laundry list of “leadership failures,” outlining what has been an undeniable roller coaster for Peloton since the pandemic began. Included are: Committing to a 20-year lease on a massive office space in New York City, Foley’s handling of a massive product recall after the death of a young child, promoting his wife to an executive position inside the company and large investments in increased manufacturing capacity, which were ultimately shuttered over decreased demand.
Last week, Foley broke from a pre-earnings “quiet period” to address some of the reports that have swirled around the company, calling news that it was halting all production false. He did, however, confirm that adjustments to production and headcount were seemingly inevitable.
“In the past, we’ve said layoffs would be the absolute last lever we would ever hope to pull,” the executive wrote. “However, we now need to evaluate our organization structure and size of our team, with the utmost care and compassion. And we are still in the process of considering all options as part of our efforts to make our business more flexible.”
Foley chided press coverage derived from a series of leaks, calling it, “incomplete, out of context, and not reflective of Peloton’s strategy,” and promised to offer more information on the company’s strategy during its February earnings call.
Blackwells, for its part, doesn’t pull any punches in the letter.
“We recognize that Mr. Foley undoubtedly regards Peloton as ‘his’ company and you, the Company’s directors, as ‘his’ Board,” Aintabi writes. “He has outsized influence and outsized voting power by virtue of his status as founder. Perhaps some of you – friends with Mr. Foley for many years – feel obligated to do as he wishes. But the law and equity markets expect more. You are not here to preserve Mr. Foley’s dignity or his pride. Your role, as directors, is not to protect him from embarrassment or to shield him from blame.”
The situation that Peloton finds iteself in is not entirely unique. Other companies that enjoyed huge pandemic-era gains have seen their values fall back to prior levels. Zoom, the video chat service that became ubiquitous during COVID, has given back nearly all of its recent gains. By late March of 2020, Zoom was worth as much as $150 per share, up from the high $60s per share at the start of the year. It rose to around $560 before falling back to $144 or so as of today.
Not all the news is bad. Peloton bottomed-out at $23.25 per share per Yahoo Finance, but has since recovered to more than $27 (at the time of writing). That the company intends to cut costs is welcome news from a financial perspective. And its huge hardware bonanza of the last few years has certainly led to more bikes in the market. Perhaps those new users will hold onto their subscriptions, continuing to pump high-margin software revenues into the company’s accounts as it looks to trim headcount and other expenses.
But cutting to profitability is not where Peloton likely anticipated to find itself just a few quarters ago.
The company is worth just under $9 billion today. A price at which it is far more acquirable than it was a year ago. The number of companies that could afford to buy Peloton at a single-digit billions price tag is modest; the number of firms that could afford to pay dozens of billions for Peloton was vanishingly slim.
Who is on the list? Apple, perhaps, though today Peloton is an Android hardware shop. Google then? Probably not. Microsoft is out, Amazon won’t do it, and our list is getting thin. It’s not a metaverse company, so Meta is a no, and what gym group has the cash to make a buy of Peloton’s scale? Private equity might be able to juice the company for upside if costs can come down enough, but that feels like a stretch.
Sitting where we are today, it doesn’t seem like a sale is imminent, given the value retained by Peloton even after its sharp selloff. That means that the company likely has to tune its own engine. Keeping its CEO during that process could prove impossible if investors continue to demand restitution in the form of executive blood.