It wasn't a surprise when The Wall Street Journal reported last Friday that Peloton Interactive (PTON +6.72%) was receiving buyout interest. After all, an activist investor had called for a sale the week before, and the connected fitness stock has plunged more than 80% since a peak a year ago.
What was surprising is that Amazon (AMZN +1.63%) was the company considering an offer. According to the WSJ, Amazon has been speaking to advisors about a possible deal. If the tech giant does go through with an offer, it would represent the first big move the company has made under CEO Andy Jassy, who took the reins from founder Jeff Bezos last July.
Amazon is no stranger to acquisitions. It's undergoing a regulatory review for its $8.5 billion buyout of MGM Studios, and it took over Whole Foods Market in 2017 for $13.7 billion, the biggest acquisition in its history. However, a Peloton takeover could set a new record, as the exercise-equipment maker currently has a market cap of $10 billion, and an offer could trigger a bidding war on top of that base price. Financial Times reported that Nike (NKE +0.51%) was also considering making an offer, and Apple (AAPL +0.54%) would also seem like a natural fit with Peloton.
Image source: Peloton.
Despite Amazon's interest, the logic for an Amazon-Peloton deal is thin at best. Media outlets and analysts have pointed out possible justifications for an acquisition. For example, Amazon could roll the exercise subscription into Prime, the e-commerce giant's logistics operations can help with Peloton's supply chain, and it would give a boost to Amazon's ambitions in health and fitness. However, those arguments look flawed, and there are a number of reasons a deal could go sour.
A likely culture clash
Amazon excels at providing low prices and convenience, the two values that have driven the success of its e-commerce business more than anything. They are what shoppers expect from the e-commerce giant. It's a mass-market, value-priced brand.
Peloton, on the other hand, is a high-end boutique brand, known for exercise bikes that cost roughly $2,000 and treadmills that are even more expensive. The company is selling an experience and community as much as it's selling a fitness product.
The fit between the two companies would likely be awkward. Making Peloton a free service for Prime members doesn't really make sense. There are less than 3 million connected fitness subscribers to Peloton and more than 200 million Prime subscribers. Most Peloton subs are probably already Prime members, and even if Amazon were to make the $39/month connected fitness subscription free for Prime members, it seems like a poor acquisition tool for future Prime members.
Peloton is still a niche product, aimed at a specific clientele. That's why there are still fewer than 3 million subscribers. It's not a service with a wide appeal like free online delivery from Whole Foods within a certain distance or free streaming television. At a valuation of more than $3,000 per subscriber, Peloton still seems expensive, especially for a value-conscious buyer like Amazon.
Amazon is a company with the phrase "your margin is my opportunity" embedded in its DNA. The typical Amazon strategy to enter an industry like connected fitness would be to undercut Peloton significantly on price and otherwise largely copy its business model.
It's also worth remembering that as a hardware maker, Amazon has traditionally sold products like Fire tablets or Echo speakers at or near cost in order to encourage more shopping on Amazon or consuming Amazon media, growing its customer base. Peloton offers none of those benefits.
Peloton needs help
Peloton was a pandemic darling, but the business now looks broken. Management misread the market demand and has been forced to slash costs and production. The company will lose more than $500 million in the first half of its fiscal year in adjusted EBITDA, and post-pandemic growth is still a question mark even if it can rightsize its costs.
Peloton could use help with marketing, products, or technology, and it's easy to imagine how Apple or Nike could directly improve the company's prospects. Peloton's equipment could pair seamlessly with the Apple Watch and its other health-tracking devices, and Apple's hardware expertise could improve the equipment or the streaming experience. Nike, meanwhile, is a master of sports marketing, as well as apparel and footwear, and it has a roster of athletes that could help build demand for Peloton's classes, even guest-hosting some sessions. And Peloton would overlap nicely with the Nike Fitness Club.
Amazon, on the other hand, has none of the core competencies that would seem to make Peloton better than it is today. It would immediately make Amazon a contender in connected fitness, but that doesn't automatically create value. The Whole Foods acquisition was supposed to propel Amazon to become a major player in groceries. Supermarket stocks plunged when the deal was announced, but nearly five years later, Amazon still has a low-single-digit market share in the grocery sector.
The company is better off focusing on areas where it already has a competitive advantage or where it can be a disruptor, innovating around Amazon Go or its new telehealth platform, for example. Connected fitness offers none of those opportunities, and Amazon's interest in Peloton makes it look like it's grasping for ideas and losing the focus of the Bezos era.
For these reasons, the tech titan is best off sitting this one out.
