Peloton (PTON) has faced a sudden change in fate over the past year, with a series of headwinds that put its stock price down 32.79 percent at the start of the year, more than 80 percent below its 2021 high.
The star stock, which rose more than 430% in 2020, has clearly faded, giving it the final blow to the revelation that Peloton is considering a temporary shutdown. According to internal documents obtained by CNBC, Peloton plans to suspend production of its most classic spinning bikes for two months from February to March.
But Peloton CEO John Foley denied in a letter to employees that Peloton plans to stop producing new spinning bikes and treadmills.
The cost-cutting approach could shift to layoffs and store closures. Peloton is working with consulting firm McKinsey , a person familiar with the matter, who reported Tuesday that Peloton has begun layoffs in its sales division, CNBC reported Tuesday.
Not only Peloton, at present, the market's enthusiasm for epidemic stocks has faded, and Netflix, ZOOM, Roblox, and Docusign are almost all facing a huge decline.
The weakening of the epidemic dividend not only needs to be addressed by the disappointment caused by the slowdown in growth, for Peloton, although it has denied the suspension of production, how to solve the production problem of its fitness equipment after the demand gradually returns to normal is the top priority.
Misestimating demand, can Peloton improve its earnings prospects?
Peloton initially set expectations for demand and deliveries for its fiscal third and fourth quarters on Oct. 31, according to Peloton's corporate report, but the results certainly showed that expectations were too high. According to the report, it reassessed those forecasts on December 14, slashing expectations.
However, Peloton still overestimated demand, with the report showing it did not take into account the company's additional $250 delivery and setup fees for its spinning bikes starting at the end of this month, as well as the impact on demand that it might see if it charged an additional $350 for its Tread.
Affected by the pandemic more than a year ago, Peloton faced the exact opposite problem, it had too much demand but not enough supply. In December 2020, it announced its $420 million acquisition of fitness equipment maker Precor, giving it more than 625,000 square feet of production space.
Last May, it would spend another $400 million to build its first plant in the U.S. to speed up production of its spinning bikes and treadmills, but it is not expected to be operational until 2023.
In recent months, when gyms reopened, consumers didn't seem to need to spend that much money on home fitness equipment. Meanwhile, the report shows that the company's upcoming $495 strength training product, Peloton Guide, and the low click-through rate of users after the email was posted, seems to indicate that "the post-COVID demand environment is more challenging."
And, at the end of the most recent quarter, Peloton had 2.49 million connected fitness users. But in the period ended Sept. 30, it had only added about 161,000 net new members, the slowest growth in two years.
Still, Peloton's share of the overall connected fitness market continues to increase. But on the downside, a report by research firm M Science suggests that Peloton's overall market share may be declining.
Peloton remains the leader in products priced at more than $1400, with a market share of more than 65 percent, with other players including Echolon, Hydrow, Lululemon's Mirror, NordicTrack and Tonal. But M Science said Peloton's share in November was down from its 2019 and 2020 levels.
Earlier, Peloton CEO John Foley said in a statement: "We are taking significant corrective actions to improve our earnings outlook and optimize costs across the company." This includes improving gross margins, moving to a more variable cost structure, and identifying cuts to our operating expenses. "
He added that Peloton will have more to share when it announces its fiscal second quarter results after the close of trading on Feb. 8. But the market now seems to think that only the announcement of a major acquisition plan can provide a catalyst for it.
Or acquired by Apple? Connected fitness in the home is still possible
In recent weeks, analysts have been cutting their expectations for Peroton's fiscal second quarter and their price target for the stock, and forecast a weak quarter for Peloton.
More radically, according to the Wall Street Journal, Blackwells Capital will call on Peloton to fire the CEO and seek a sale.
Blackwells Capital holds less than 5 percent of Peloton's significant stake and is poised to push the company's board to fire CEO John Foley and seek a sale, according to people familiar with the matter. It sees Peloton as an attractive acquisition target for large technology or fitness-type companies.
Coincidentally, Brian Lichtor of Roundhill Investments thought about what company might theoretically be interested in PTON.
"Peloton is worth less than $10 billion, and given its strong brand loyalty and valuable intellectual property, it would make a lot of sense for a company like Apple to acquire Peloton and integrate Peloton into health apps."
Apple has previously been recognized as a natural person interested in the Peloton ecosystem, as have Nike, Google and Amazon, along with Garmin or SoulCycle.
From the early days of the pandemic, when demand was too much to deliver enough fitness equipment, to the third year of the pandemic, with gyms reopening and COVID restrictions lifted, consumer demand waned, and Peloton wanted to control costs and may face production stoppages.
And perhaps fortunately for Peloton, the company doesn't just rely on hardware sales to grow its overall business. According to Kenneth Leon, head of research at CFRA Research, Peloton's digital subscriptions account for two-thirds of the company's revenue, and it includes a library of real-time and on-demand workout classes that include yoga, strength training, boxing and more.
While the enthusiasm for home concept stocks has faded, home fitness and digital health are not ending there, and devices have always been an important way for customers to gain insight into products and services.
Leon also said that big tech companies could be drivers of digital health and fitness growth. Facebook is reportedly working on a smartwatch, while Apple is continuing to develop its Fitness Plus service.
These two years have been dramatic for Peloton, which is now worth less than $8 billion, which will naturally spark some interest in mergers and acquisitions, but it seems that the market still feels that the current valuation is somewhat expensive.
Still, analysts at Raymond James say demand for Peloton hardware is likely to continue to weaken, but they expect Peloton's subscription service to perhaps bring a silver lining to the catastrophic month.
epilogue
Can these COVID-19 stocks, which have been trumpeted from COVID, survive as the market boom subsides? This is a test that many companies face. For Peloton, it may not be possible to go back to past growth rates. In terms of its stock price, being acquired by Apple is indeed a powerful catalyst.
But we also want to know if Peloton can go further in the fitness and leisure market, and it is now important to take the right corrective actions to balance demand and production, while consolidating the market share of core products and strengthening the growth of subscription services may drive its earnings prospects.
This is also a warning to all crazy epidemic stocks, and returning to steady growth and stable cash flow is the feasible direction for decision-makers and investors.