Hi, The Investor’s Podcast Network Community!

💪 Welp, it’s time to work off some of those Thanksgiving calories. What’s your favorite type of exercise?

The benefits of physical activity are wide-ranging. There are plenty of options, whether it’s a simple walk, jog, lift, yoga, stretch, swim, or bike ride.

Speaking of exercise, today we’ll discuss Peloton’s rapid rise and recent spinout.

All this, and more, in just 4 minutes to read.

— Matthew

QUOTE OF THE DAY

“Why should the immediate opportunity set be the only one considered, when tomorrow’s may well be considerably more fertile than today’s?”

— Seth Klarman

 

 

WHAT ELSE WE’RE INTO

📺 WATCH: Why Aldi is America’s fastest-growing grocery store

🎧 LISTEN: Lucrative opportunities in private credit with Nelson Chu

📖 READ: Time management tips to become more efficient

PELOTON’S RISE AND SPINOUT

Photo by Andrew Valdivia on Unsplash

4oo ‘No’s’

Once a high-flying fitness craze, Peloton is just trying to stay afloat today.

The fitness bike maker launched in 2012 by former Barnes & Noble executive John Foley. The idea: Give people who don’t have time (or the money) to go to a full-fledged fitness studio the ability to experience an excellent workout from the comfort of their home.

Foley had the idea when he realized that instructor-led workouts could be more fulfilling than trips to the gym. Although he spent most of 2012 raising $4 million, the company’s rise didn’t come easy.

“I got 400 ‘no’s,'” he said. “The worst part is that we’re not talking about 400 individual pitches. A lot of people would want me to come back four or five times and have me meet more partners and pitch again. I would say that I’ve been turned down maybe five or six thousand times.”

Still, Foley kept driving forward, pitching, and dreaming. By 2015, he’d raised another $40 million to open brick-and-mortar retail locations to sell bikes, strengthen the digital presence, and market the product. In 2019, Foley and Peloton went public, just in time for a pandemic-induced boom in at-home fitness.

But Peloton — a cycling term meaning riders “bunched together” — suffered after gyms opened back up, inventory levels rose amid slowing demand, and subscriber growth stalled.

In its IPO filings, Peloton estimated that its U.S. customer base could be 45 million people. That has proven to be far from reality. Today, it makes most of its money from its 3 million subscribers, and its market capitalization has dropped over 90% from its 2020 peak.

“Inventory will continue to burn cash flow in fiscal 2024,” Peloton’s CFO said this year.

 

From: Bloomberg

Too much inventory

Peloton’s tailwinds in 2020 ultimately drove its fall.

In 2020, the company was cruising, catering to wealthier individuals — most of its customers earn over $100,000 — with well-liked classes by leading instructors for everything from cycling and running to yoga, strength training, and meditation.

That year, Peloton gained nearly one million subscribers, partly because gyms closed down. Business was booming so much that demand outpaced supply. It couldn’t produce and ship enough bikes to meet orders, just as the stock price peaked at around $162, an all-time high. The market cap had risen to $50 billion despite not being profitable.

Yet, failing to meet demand was only the first straw.

Peloton ramped up production into 2021, anticipating the same demand for years. The problem? Demand cooled off drastically in 2021 when gyms re-opened, and suddenly Peloton had too much inventory.

In short, Peloton expanded aggressively to keep up with orders, but that investment left it with many unsold bikes.

Then Peloton slashed prices to try to re-boost sales, but demand kept falling, and the stock began a rapid descent. To make matters worse, a child died on one of its treadmills, prompting a recall that totaled about $165 million in losses.

 

From The Wall Street Journal

Peloton’s stock has fallen to about $5 per share, a 95% decline from the peak.

Foley, the founder, has been replaced by CEO Barry McCarthy, a former executive at Netflix and Spotify, both enormous subscription businesses.

“I have never been more optimistic and excited about the future of the business. There is just an enormous disconnect between the stock price and the energy in the building,” McCarthy said on a recent earnings call.

However, Peloton has struggled with its pricing strategy and further lowered its treadmill and rower prices by about 14% and 6%, respectively, in attempts to increase recurring subscription revenue.

McCarthy has cut costs by reducing physical stores to 69, down from 135 stores as of mid-2022. He’s led numerous rounds of layoffs, totaling over 5,000 staff members. Four top executives have departed amid the fall.

On a positive note, many of its most popular fitness instructors — some reportedly earn around $500,000 yearly — have remained with the company amid its fall.

 

A great comeback story?

McCarthy has spearheaded deals with Lululemon and sports organizations like the NBA and the University of Michigan. It’s also signing deals with gyms and hotels. More partnerships are expected to follow.

Meanwhile, the company’s rental program, which lets users pay monthly for a bike, could double in 2024.

“Rentals accounted for more than 33% of bike orders last quarter, which is to say it seems like we’re onto a big growth opportunity,” McCarthy said in a recent shareholder letter.

Still, the sales slump is ongoing. Critics believe anybody who wanted a Peloton already has one, and the price of its equipment is too high for most people.

Peloton also hasn’t succeeded in converting users of its free app into paying subscribers. A key focus moving forward lies in getting free subscribers to pay up with monthly piers at $12.99 or $24 per month.

Turning its app into a growth engine will be a “long-term work in process,” McCarthy noted in a letter.

“And now that the reset button has been pushed, the challenge ahead of us is this … do we squander the opportunity in front of us or do we engineer the great comeback story of the post-Covid era?” McCarthy said.

“We have to be willing to confront the world as it is, not as we want it to be if we’re going to be successful.”

 

Dive deeper

For more, check out The Wall Street Journal’s video breakdown of Peloton’s rise and fall.