Shares of Peloton Interactive (PTON +1.30%) closed up 25% today after the company announced a new turnaround strategy this morning and released its second-quarter earnings report early.
Investors were initially unsure about the news as the stock was down in pre-market trading before rallying shortly after the market opened. Though the connected fitness stock is still down about 80% from its peak last year, it's up nearly 70% from its low just two weeks ago with the help of buyout rumors yesterday.
Image source: Peloton.
What the company effectively did today was rip the Band-Aid off the business's core challenges. Management badly misread consumer demand coming out of the pandemic, leading to wide losses, and it's now focused on correcting that error. CEO John Foley will step aside and become executive chair, leaving the hot seat for Barry McCarthy, the former CFO of Netflix and Spotify, two of the biggest subscription businesses in the world.
Peloton also said it would axe 2,800 corporate jobs, or roughly 20% of its corporate workforce, abandon its Peloton Output Park factory, and shift to third-party supply chain solutions as part of an effort to trim $800 million in annual expenses and become consistently profitable.
Is Peloton a buy now that its turnaround strategy is clear? I've been skeptical of the company in the past for a number of reasons. Fitness is a fickle and fragmented business; post-pandemic headwinds seemed inevitable, and its market seems limited as a luxury brand.
However, the decisions the company made this morning, especially the cost cuts, are the right move and necessary to put it on track for profitability. Thanks to its high-margin subscription business, Peloton could easily be profitable again a year from now.
I'm not ready to call the stock a buy yet. There are still challenges remaining like headwinds from a full reopening, a new CEO taking over, and eroding subscriber growth, but with today's announcement, it looks like the worst is in the past for Peloton. Still, investors should expect a bumpy road ahead.
