It’s been a hot minute since a publicly traded hardware company experienced a valuation correction as dramatic as Peloton’s. As a former hardware founder and investor, I can’t help but feel sorry for the no-mercy hill climb the company finds itself in.
Peloton hasn’t been able to catch a break, even in an era where working out at home became a much better idea than sharing equipment at the nearest gym.
After hitting a 52-week peak of $155.52 per share, the company’s stock crashed 84% in value in just a few short months. It’s nothing short of incredible, given that it was once a darling of Wall Street and customers alike.
While it’s hard to point at a single point of failure, the company’s streak of bad luck has been so spectacular that it’s not too soon to ask if gross mismanagement might be at play, and some investors already are.
So far, the story goes like this: Peloton users’ private account data was leaked, GPS coordinates were accidentally embedded in users’ profile pictures, products were recalled after the tragic death of a 6-year-old, and two different TV dramas showed characters getting hurt while using a Peloton, followed by a textbook example of bumbled crisis management.
The company’s public market journey has been far from calm. Peloton filed for an IPO back in 2019, targeting a price range of $26-$29 per share for a valuation of up to $1.2 billion. Eventually, it listed at $29 per share, only to struggle alongside other hardware IPOs of the time.
Peloton built up a cult following even before we all went into lockdown, but the pandemic helped fuel a meteoric rise in value and investor adulation. But even as its stock price climbed and subscriptions soared, analysts seem to have read the writing on the wall: They gradually downgraded it from “buy” to “hold” before cutting their rating to a “sell.”
The company appears to have ultimately failed to bolster its long-term financial health during its time in the spotlight. This week, Peloton announced that longtime CEO John Foley was stepping down. Former Spotify CFO Barry McCarthy will take the helm.
McCarthy was the CFO of Netflix from 1999 to 2010, the tail end of the DVD years before the company became a streaming giant. With a resume that lists board experience at Pandora, Eventbrite, Wealthfront, Spotify and Instacart, he’s facing a hell of a ride as he tries to right the ship at Peloton.
One thing is for certain: Peloton needs a beast of a turnaround to save its bacon. Armed with a team from McKinsey to see what can be salvaged, McCarthy must pool his available resources to chart a new course for the morale-battered company. So, what happened? Let’s take a closer look.
In 2019, Peloton endured lots of bad press — deservedly so. A tone-deaf and sexist TV ad seemed to be a turning point, coming around the same time the company reported that its churn rate had doubled. In a SaaS universe where customer retention is one of the most important metrics, that’s not a good look.
Once news broke at the end of 2020 that vaccines were coming to market, fitness stocks arrested their free fall, and a few companies that saw their fortunes rise during the pandemic were left scratching their heads.
Zoom and Peloton both took a beating, and while there’s an easy case to be made for remote meetings, an exercise bike that sells for nearly $2,000 and comes with a relatively expensive subscription is not nearly as essential. As TechCrunch’s Alex Wilhelm mused in late 2020, “Companies are worth the present value of their future cash flows, so when the latter part of that equation changes, the former does as well.”
Peloton launched apps on Android TV and (much later) on Apple TV with $13-per-month subscriptions in 2020, seemingly in a bid to cash in on the pandemic home exercise boom for people who didn’t own its hardware, and rumors started swirling that it was going to offer a lower-end treadmill and a higher-end bike. It did launch both, with a $2,495 price tag each.
Competition was heating up, though. For the briefest moment, VC firms got less gun-shy about investing in connected hardware fitness at the end of the year, with money flowing into Series A and B investments for Rumble, Tempo, FeetMe, Fiture and others. Meanwhile, Peloton found itself fighting a knockoff that went on sale for $500. A few months later, CES 2021 was filled to the rafters with every imaginable at-home fitness solution.
Alongside this influx of competing players, the global pandemic saw supply chains dissolve under the strain of trying to ship goods, chip shortages, and workforces decimated by illness and societal disruptions. Peloton announced it was plowing $100 million into delivery logistics, and frankly, the move didn’t make much sense. Sure, the customer experience is a pain point that might slow its growth, but the company once again seemed to fail to realize that in a post-IPO world, customer happiness was secondary to its fiduciary responsibility to its shareholders.
Needless to say, the stock market wasn’t a big fan, and the company saw its share price plummet once again.
Even as Wall Street was starting to doubt the future of at-home workouts, Peloton announced plans to buy Precor, one of the world’s largest commercial suppliers of fitness equipment. The deal was completed in April 2021, but by then, more than 30% of the U.S. population had received at least one COVID-19 vaccine, and the number was increasing sharply. This would have been a great moment to course-correct and build up the company’s path to the future, but it appears that the executive team had its attention elsewhere.
Desperate to shore up its manufacturing capacity, Peloton announced it was planning to invest nearly half a billion dollars into building U.S. production facilities. The move was applauded by the kind of folk who get excited about creating manufacturing jobs, but even at the time, it seemed like a knee-jerk reaction to supply-chain woes. The company announced this week that the 200-acre facility would not be built after all, and that it is planning to sell the land after investing $90 million to $100 million in the plant.
Companies change strategy all the time, but if you’re planning to build a $400 million factory, get a quarter of the way through and quit with nothing to show for it, you’re feeding the narrative of executive incompetence.
In May 2021, the company initiated a recall after the death of a 6-year-old child and reports of injuries to 29 children and 72 adults.
Five months later, the former CEO put Jill Foley, his wife, in charge of a new product line called Peloton Apparel. (Not for long, though; she will soon be “transitioning away from her role” alongside her husband stepping down as CEO, according to a statement from Peloton.)
She had a rocky start: On a call at the Goldman Sachs Technology & Internet Virtual Conference earlier that year, Foley said, “We don’t really need to make money on our apparel business, because it is not our core business.”
One might get away with saying such things when the core business is successful, but in a world where apparel can be far more lucrative than core brand experience, it starts looking like you don’t have focus, especially when your core brand is struggling. Investors began paying extra attention and added this Business School 101 mistake to their rapidly growing list of the CEO’s shortcomings.
The company’s financial credibility took another beating when CFO Jill Woodsworth mentioned on an earnings call in early November that the company wouldn’t need to raise any additional capital, only for Peloton to turn around a couple of weeks later and say it was raising an additional $1 billion through an equity offering. This isn’t that unusual — companies raise additional capital all the time — but it is usually done when stock prices are running high and they can raise at a good valuation with a specific goal in mind.
In this case, Peloton stock was trading at around $50, half the value they were at just two months prior. This is the kind of stuff that makes analysts and fans of the stock market seriously wonder what is going on within the four walls of the pedal-peddlers. From my perspective, it reeks of desperation. Whenever any company — startup or otherwise — raises money from a place of weakness, they put themselves in an awful bargaining position: It becomes very obvious that the company needs the money more than the investors need the stake in the company.
Last month, a group of activist investors started rattling their sabers in a call for change. Reports surfaced that the fitness company hit the brakes on its bike and treadmill production due to falling demand, and Peloton’s CEO leaped in with a response that no, the company was merely “right-sizing” production to align the manufacturing output with the market.
That sounds an awful lot like PR spin to me, and investors seemed to agree, with Blackwells Capital (which owns less than 5% of Peloton, Business Standard reports) posting a particularly savage call to action in the form of a 52-page presentation earlier this month.
The firm claims that Peloton delivered the very worst shareholder return of any company in the Nasdaq 300 index, and suggests that someone — anyone — should leap in and buy the company immediately, rattling off a desperate list of potential acquirers that included Netflix, Lululemon, Disney and Apple.
Some of these names might make sense, but it’s hard to imagine who would take the opportunity. This unenviable task falls to the company’s new CEO. Of course, it’ll help that he has been doing the rounds of the upper echelons of publicly listed companies for the past couple of decades and that people will pick up the phone when he calls.
Earlier this week, the company said it fired 20% of its corporate workforce, with the dubious severance perk of a free year’s Peloton subscription.
Peloton got a lot of things right: Its subscription model for content allows it to continue to generate revenue from customers even after their bikes are fully paid off. Highly engaging instructors fostered customer delight and continued engagement. The product itself — recalls and mishaps notwithstanding — is extraordinary, bringing gym-quality equipment to the home, and the gamification of the leaderboards is world-class.
It’s possible that righting the ship, focusing on core business and setting the company up for a clean, quick, fire sale are the next steps for the company’s fresh CEO. At the heart of things, Peloton has a solid business, and if it can focus on the quality of its content and smooth over a somewhat frayed reputation, the brand could be restored to its former glory. In addition to new products (references to a rowing machine have been spotted in the company’s Android app), the company could throw its weight behind geographic expansion even as it might see some shrinkage at home.
Peloton had one of the biggest tailwinds that the world has ever seen, with a pandemic-fueled sales bump for the ages. Nonetheless, it failed to prepare for what happens when market forces reverse. It would have been forgiven for joyously racing to the top, but in a world of public markets, predictable futures and activist investors, failing to plan rigorously for a post-pandemic world seems borderline irresponsible.
That seems to be the utterly predictable trap the Peloton management team and board walked itself into, and it’s rather hard to sympathize.
I do hope Peloton finds a soft landing spot either in the shape of a company in its own right or as an acquisition target. I wouldn’t cry over Peloton’s content going dark, but a lot of love, craftsmanship and genuine talent went into building an incredible content library for fitness. Even if they stop doing live classes, it would be worth keeping the servers online so you can play on-demand content as you burn your quadriceps to a smoldering crisp.
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