What happened
Shares of connected-fitness company Peloton Interactive (PTON -2.24%) were up slightly on Tuesday morning even though the market was down. And it appears to be because of an announcement the company made regarding equipment manufacturing. As of 10:30 a.m. ET today, Peloton stock was up 5%.
So what
Peloton has two components to its business: exercise hardware and subscription content. Regarding its exercise hardware, the company spent 2019 and 2020 trying to bring manufacturing in-house. Today, it announced a reversal of that trend.
Peloton's treadmills and exercise bikes will be manufactured by Rexon Industrial in Taiwan, a manufacturer it has an existing relationship with. As part of the announcement, the company said it was getting out of the manufacturing business. And this includes suspending operations at Tonic Fitness Technology, a Taiwanese company Peloton acquired in 2019 for almost $50 million.
It appears the market appreciates this attempt from Peloton to potentially improve its cost structure. And that's why this out-of-favor growth stock was up today.
Now what
Personally, I don't like when companies abruptly reverse course. Peloton spent $50 million for Tonic less than three years ago only to shut it down. And the move brings into question its $420 million acquisition of Precor because that acquisition also was meant to increase its manufacturing capabilities in the U.S.
However, I concede that with new management comes new vision. And Peloton is under new management now. When new CEO Barry McCarthy was hired in February, lead independent director Karen Boone said, "This leadership transition will best position Peloton for sustainable growth, profitability, and long-term success." Therefore, it was clear from the beginning that structural changes to the business were coming.
Time will tell if McCarthy's sharp pivots away from previous managerial decisions are the right ones.
