The Peloton share price has collapsed by 85% since its record high to just $25 last week. But a strategic restructuring, takeover rumours, and solid Q2 results have seen the stock pop.

Source: Bloomberg

 

Shares Peloton (exercise equipment company) Chief executive officer Company Investor Revenue

 Charles Archer | Financial Writer, London | Publication date: Friday 11 February 2022 

The Peloton (NASDAQ: PTON) share price soared during the covid-19 pandemic, as business boomed during lockdowns which saw gyms close worldwide. In December 2020, the stock was changing hands for a record $163, up 715% since mid-March.

But since then, Peloton shares collapsed 85% to a low of just $25 last week. However, it’s now soared 52% to $37 today.

Peloton share price: Q2 results

Tuesday’s earnings represented a mixed picture. Positively, Peloton’s Connected Fitness Subscriptions (CFSs) grew 66% to 2.77 million, while paid Digital Subscriptions grew 38% to 862,000. And CFS Workouts grew by 26% to 123.2 million, though the average number of monthly workouts fell to 15.5 compared to 21.1 in the same quarter last year. Moreover, the company’s 12-month retention rate was an impressive 92%.

And in forward guidance, Peloton expects to have 3 million CFSs by the end of the financial year and generate between $3.7 and $3.8 billion in revenue with a gross profit margin of 28%. And in Q2, revenue grew 6% year-over-year to $1.14 billion, with a gross margin of 24.7%.

But the company made a net loss of $439.4 million. With US inflation hitting 7.5%, affordability could be becoming an issue. And after a series of public relations disasters, including two fictional televised heart attacks while using Peloton equipment, CEO John Foley is stepping down as CEO and transitioning to the role of Executive Chair. But Foley told investors that he ‘couldn’t think of a better CEO for Peloton’s next stage of growth’ than his replacement, former Spotify and Netflix CFO Barry McCarthy.

However, the company is still being investigated by the US Department of Justice over the death of a child under one of its treadmills. Dozens have reported injuries, and the company was forced to recall 125,000 machines after previously stating there was ‘no reason’ not to use them.

Takeover prospects

Shareholder Blackwells Capital had previously called for Foley’s removal, arguing that he has made ‘a series of poor decisions relating to product, pricing, demand, safety and capital allocation.’ Its chief investment officer, Jason Aintabi, has accused the former CEO of ‘repeated failures,’ thinks the company has been ‘horribly mismanaged,’ and even believes that ‘Foley has proven he is not suited to lead Peloton, whether as CEO or Executive Chair.’

However, Foley, his wife and other insiders together control 60% of the company’s shares, while Blackwells owns less than 5%. It could be that Foley’s job change is a compromise that all parties will have to live with.

But the company has just suffered another public relations gaffe. After informing investors that there would be ‘a meaningful reduction of our workforce,’ 2,800 staff discovered that their jobs had been axed. Some only found out they were being fired when access to their work Slack accounts was cut off. And to add insult to injury, Peloton included a year’s subscription as part of its employees’ severance package. This led to the new CEO’s first meeting being flooded with disgruntled former employees complaining of ‘leadership failures,’ and protesting that the company is ‘awfully tone-deaf.’

But while Peloton expects severances to cost a one-off $210 million, Foley believes that its ‘restructuring initiatives (will) yield at least $800 million in annual run-rate cost savings across operating expense efficiencies.’ This includes the scrapped plans for its Ohio facility, which was set to cost $400 million and increase Peloton’s workforce by 2,000 people.

On the plus side, Blackwells believes that Peloton is ‘extremely attractive’ to companies such as Nike, Apple, Disney and Sony, with a complementary subscription model that will help them expand into the growing wellness sector. And Foley has told the Wall Street Journal he is ‘open to exploring any opportunity that could create value for Peloton shareholders,’ which has led to intense buyout speculation.

Wedbush Securities ‘would be shocked if Apple is not aggressively involved in this potential deal process’ as the company has a ‘clear strategic fit with its healthcare/fitness/subscription initiatives, while Amazon and Nike among others could be potential bidders.’ Meanwhile, Bright Trading LLC’s Dennis Dick believes that ‘there is still a potential that we could see a deal... that is why (Peloton) is not getting as hit.’

Foley accepts this is a ‘humbling’ and ‘challenging’ time for Peloton but remains ‘confident in the fundamentals of our business.’ A potential bidding war could see an aggressive recovery for the Peloton share price.

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