In 2020 and 2021, certain companies became synonymous with surviving lockdowns. Zoom went from a relative unknown to the most popular platform for connecting students with teachers, businesses with clients, and individuals with their families.
Netflix, already a leader in the streaming space, was a “must-have” for quarantine living. Early in the pandemic, just about everyone watched The Tiger King, and the Joe Exotic vs. Carole Baskin debate offered a welcome distraction from the frightening health news.
Peloton Interactive wasn’t new in 2020. The company was founded in 2012 and sold its first stationary bicycle in 2013. However, the fact that Peloton went public on September 26, 2019, meant it was top of mind in the first quarter of 2020 when in-person facilities like gyms and sports facilities shut down.
Demand soared for the pricey bikes, and the company couldn’t keep up. Peloton users said they were “obsessed,” and Peloton scrambled to deliver on a huge influx of 2020 holiday orders.
Peloton’s management suggested that the company was on its way to a trillion-dollar valuation, and Peloton started expanding its manufacturing facilities in anticipation of multi-year growth.
Peloton stock returned 440 percent in 2020, peaking at more than $171 per share in January 2021. Unfortunately, in the year that followed, Peloton stock went straight down, losing approximately 85 percent of its value.
That drop was a shock for shareholders and a source of endless discussion among analysts. Why did Peloton stock go down? Will Peloton stock recover? And for those considering adding the company to their portfolios in anticipation of a rally, is Peloton stock a buy?
Why Did Peloton Stock Go Down?
Peloton stock spiked at the start of the pandemic when a variety of factors aligned in just the right way to put Peloton in the spotlight. However, it seems that the company’s luck turned all at once.
A number of challenges came up one after another, making it impossible for Peloton to react quickly enough to protect share prices. The drop was nearly as sudden and steep as the company’s rise.
The biggest issue facing Peloton is a steady decrease in demand for its equipment and content. As the world learns to live with the new virus, consumers are returning to pre-pandemic activities like team sports, fitness centers, and outdoor recreation. Even users that had once called Peloton bikes and classes “addictive” began to fall out of love with the machines due to a series of manufacturing, safety, and public relations nightmares.
First, it was supply chain disruptions. Peloton couldn’t meet the demand for its machines during the 2020 holiday season, and it made some expensive moves to remedy the problem for the future. Peloton began with the acquisition of Precor for $420 million – a transaction that closed in April 2021. Then, it announced it would spend another $400 million to build a brand-new factory in Ohio.
Meanwhile, paying customers still didn’t have the bikes they ordered in early 2021, so then-CEO John Foley put $100 million into expedited shipping and other temporary measures to resolve the issue. That led to a new problem – bikes built in Taiwan starting coming in with obvious rust.
In desperation, Peloton painted over the rust and delivered the bikes to customers. Of course, that particular cover-up wasn’t made public until later. When it came to light, the Peloton brand took a big hit.
Are Peloton Bikes and Treadmills Safe?
In addition to the supply chain disruptions, Peloton found itself in the hot seat over a number of safety concerns – both real and imagined.
Two fictional television characters had heart attacks during Peloton workouts, prompting a flurry of headlines like, “How Worried You Should Be About Having a Heart Attack on Your Peloton?” and “Are You at Risk for a Heart Attack During Your Workout?” Certainly not the sort of publicity that is likely to prop up flagging sales.
Then there were the actual safety issues. One of Peloton’s early models had already been cited by the US Consumer Product Safety Commission for concerns with touchscreens falling off of their mounts and injuring users – a relatively minor issue, albeit an unflattering one. However, that was nothing compared to the death of a child in April 2021, which was directly related to the Peloton Tread+.
When the US Consumer Product Safety Commission examined Tread+’s record more closely, it found a total of 72 separate incidents in which children and animals were injured by the machines. That prompted a recall – and added to the increasing distrust of the brand.
The timing for this collection of challenges couldn’t have been worse. Just as Peloton increased its manufacturing capacity to meet the sort of demand seen in late 2020 and early 2021, demand went down. A lot.
New customers weren’t signing up, and existing users were gradually reducing time spent in Peloton’s virtual world. The intensive investment of resources into factories, marketing, and content development caused significant losses – $376 million for third-quarter 2021 and $439 million for fourth-quarter 2021.
In early February 2022, John Foley – one of Peloton’s co-founders – stepped down from his position as CEO. The company took dramatic steps to reduce expenses, including workforce reductions totaling approximately 2,800 employees or 20 percent of its staff. The Ohio factory project was completely abandoned, and Foley himself admitted that the purchase of Precor was a big mistake.
So, where does that leave Peloton and its shareholders today?
Will Peloton Stock Recover?
Peloton may be down, but it’s not necessarily out. The truth is that this company attracted 6.5 million users for a reason. People love the virtual technology that allows them to work out with world-class trainers and fellow trainees from the comfort of their own homes, and the company may still be able to make something from that.
Ultimately, Peloton’s success, both short-term and long-term, will come down to its ability to change direction and bring the strength of its brand back to its former glory.
The new CEO, Barry McCarthy, is accustomed to life in the digital world. He served as Chief Financial Officer for companies like Spotify and Netflix, and he knows what it takes to attract and retain customers – and create profit – from digital products and services.
It appears likely that McCarthy will refocus Peloton, putting more emphasis on digital content and moving away from the manufacturing of home exercise equipment. The concept, widely referred to as BYOB (bring your own bike), will make it possible for users to enjoy Peloton classes and camaraderie through the subscription-based service without buying a bike or treadmill directly from the company.
Alternatively, Peloton may decide to minimize up-front equipment costs and remove the option of using a Peloton bike or treadmill without participating in subscription-based services by combining digital access and equipment fees into a monthly subscription fee.
McCarthy indicated that he is planning to begin with lots of experimentation, data collection, and analysis. He wants to learn exactly what consumers are looking for, and then he will restructure the company to meet those needs.
So, there’s bad news for shareholders who bought Peloton stock on its way up. It’s unlikely to recover and reach new heights soon – if ever. However, Peloton stock will probably see growth beyond its current low if – and only if – McCarthy successfully executes on his turnaround strategy.
Is Peloton Stock A Buy?
In Q1 2022, Peloton stock got a bit of a boost when rumors of a buyout gained traction, and that possibility is keeping even the most pessimistic investors interested. While Peloton has been clear that it is not seeking a buyer, its current low price coupled with certain attractive assets could be enough to bring one of the big tech companies to the table.
Digital fitness is a growing market, and big tech knows it – that’s why Google acquired Fitbit. Any of the streaming services – Amazon, Disney, or Netflix, for example – might want Peloton content, and there is always the possibility that one of the sporting goods companies like Nike or Under Armour will decide to enter the digital fitness market.
An acquisition could drive Peloton’s share prices up. If no buyer materializes, the company’s new direction under CEO Barry McCarthy may grow stock value organically.
In either case, at its current price, Peloton stock isn’t necessarily a bad choice, though most analysts stop short of calling it a strong buy. It’s a risky move, but one that is more likely than not to create some level of return for shareholders… eventually.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.