Peloton: are the Wheels Falling off?

Peloton Interactive Inc (PTON) has had a deeply troubled 2021. The home-workout company went public in late 2019, but it wasn’t until mid-2020 that Peloton stock hit its stride: climbing over 120% between the start of August and the end of December. Now, with a whole host of issues surrounding the company, including a losing faith in management, product recalls, post-pandemic worries and class action lawsuits, Peloton stock has lost almost 70% of its mid-pandemic value. Despite this, the company has achieved remarkable things in a short period, with a limited array of products on offer. Investors should not forget that Peloton is still in its infancy and, as such, volatility is likely. The question, then, is whether the risk of owning Peloton stock will ever be worth the reward.

Peloton was founded in 2013, after co-founder and CEO John Foley raised over 300,000 USD to fund his start-up. Since then, the company has become a huge name and a front runner in the home fitness industry, with 3.1 million users as of June this year. At present, Peloton makes exercise bikes and treadmills, with an interactive real-time element, allowing subscription holders to remotely participate in classes. This simple idea has plenty of room for further growth; rumours are already circulating about Peloton’s development of an interactive rowing machine, for instance. 

In the short term, however, the company has struggled. In May, Peloton was forced to recall its Tread and Tread+ models after a series of injuries and one death whilst using the machines. Foley admitted that ‘he had made a mistake’ in not ordering a recall sooner and an agreement with the US Consumer Product Safety Commission meant that the company was forced to give full refunds to buyers that no longer wanted the product. Furthermore, there were concerns around the management of the company and its relationship with investors. After a significant fall in cash and cash equivalents in March, down 600 million USD from the last quarter, Peloton CFO Jill Woodworth claimed that the company did not‘seethe need for any additional capital raise based on [the] current outlook’. A week later, the company announced an equity offering worth more than 1 billion USD, diluting existing shares and directly contradicting Woodworth’s previous claim. Decisions of this nature are unlikely to be popular with Peloton shareholders going forward and, with inflation ramping up and high-interest rates on the horizon, funding from either debt or equity is starting to look costly, especially for a company that is yet to make a profit. 

Undoubtedly, the last quarter’s (Q3’s) earnings report added insult to injury. On the 4th of November, Peloton reported a net loss of 376 million USD, which equated to 1.25 USD per share. Although the loss was expected, its magnitude was not. The corresponding sales figures were equally as worrying, with the sales of connected fitness products (responsible for 62% of the company’s business) down 17%. As the economy reopens, consumers can return to gyms, and, with inflation worries looming, lockdown savings may not be spent as frivolously as imagined. Accordingly, critics are wondering who will still spend 2000 USD on a stationary bike. In the light of these objections, even Jill Woodworth admitted that the company had ‘underestimated the reopening impact’, announcing a hiring freeze in response to a decreased demand for Peloton units. Moreover, Litigation firms including, but not limited to, Labaton Sucharow and Bernstein Liebhard filed class-action lawsuits against Peloton this month, arguing that the company misled shareholders about its post-pandemic prospects. 

Despite all of this, and the growing negative sentiment surrounding the company, speculators are taking the opportunity to get in whilst shares are cheap. After all, Peloton rose to lead a new market, elegantly carving out a niche, establishing a strong brand, and capturing millions of users whilst only really offering two products. With the company pouring money into research and development (89 million USD last year) and the potential for new products on the horizon, it seems as though there is at least a possibility that the current lull will be temporary. Analysts at several significant investment banks, including Credit Suisse, J.P. Morgan and Bank of America have all maintained ‘buy’ ratings for Peloton stock within the last month. Furthermore, J.P. Morgan analyst Doug Anmuth lowered the investment bank’s price prediction, citing post-pandemic ‘operating environments’ that were ‘difficult to project’ and arguing that Peloton ‘over-estimated near-term demand and traffic levels for both the Bike and Tread’. Nevertheless, J.P. Morgan’s new price prediction (90 USD per share) still represents a considerable boost for the company, whose stock currently trades at 46.41 USD. 

Despite a difficult month and a difficult year, Peloton’s stock may still be a good bet for growth. It seems as though the future of the company hangs in the balance. Perhaps, failing management, poor planning and a whole host of lawsuits will see the company fade away in the coming years. However, nothing about the current issues at the heart of Peloton necessarily detracts from the bull thesis: Peloton has established a strong brand and captured the business of millions of people in a matter of years, all with a very small product offering. It is, perhaps, the strength of the brand that has motivated investors to treat Peloton as if it were a well-established growth stock with a proven track record. But this is not the case. The company is still, after all, in its infancy. Investors should treat it as such, understanding that volatility is likely and basing their investment around its long-term prospects. The future of the stock, and perhaps the company, will depend upon whether the market is prepared to take a risk on Peloton. 

By Alex Mortimer

Sector Head: Robert Armstrong-Jones