Amazon (AMZN 0.10%) is the largest e-commerce company in the world with a market value of over $1.3 trillion. Its website generated 2.7 billion hits last month, making it a no-brainer platform for brands that want to elevate their online presence.
Peloton (PTON 6.24%) is set to join that club, announcing this morning that a range of its products and merchandise items are now available on Amazon's U.S. website. It's the latest in a string of drastic moves by the maker of at-home exercise equipment, to arrest rapidly slowing sales and expanding financial losses.
The partnership is a win for Peloton, but it's likely a bigger win for Amazon. Here's why.
Image source: Getty Images.
Peloton is retooling for a world beyond pandemic restrictions
Peloton was one of the best-performing companies during the worst of the pandemic. Gyms were closed, workers were attending their jobs remotely, and society was enduring varying degrees of lockdowns. That left few opportunities for people to get their exercise fix, so a range of interactive at-home equipment that brought the workout – and the classes -- into the home was a proverbial home run.
But as pandemic restrictions eased thanks to widespread vaccinations, Peloton's business quickly deteriorated. The company will report its financial results for the fiscal 2022 full year this week, and it's expecting that revenue will come in at around $3.5 billion, which would be a sizable drop from the $4 billion it generated in fiscal 2021.
The drop in sales is underscored by a steep drop in engagement, measured by the average number of monthly workouts in the most recent fiscal third quarter which fell 28% year over year. Put simply, gyms are open, people are free, and they're using their Pelotons far less often.
The company installed a new CEO at the beginning of 2022 and tasked him with righting the ship. So far, sweeping changes have been made which include staff layoffs and broad cost cutting, a trial of a new subscription-based sales model for its equipment, and moving production to external manufacturers.
Now, for the first time in its history, Peloton will deviate from its direct-to-consumer sales model and offer the Peloton Bike, Peloton Guide, accessories, and apparel outside of its showrooms and its website, on Amazon.com.
Why this partnership is a big win for Amazon
Earlier this year, Wall Street was abuzz with the news that Amazon was interested in buying Peloton. The move would have been well within Amazon's wheelhouse because it's no stranger to acquisitions -- and Peloton would've been a relatively small one given the company is worth just $4 billion as of this writing, thanks to a 92% drop in its stock price from its all-time high.
It ultimately never happened, but with this new partnership in place, Amazon gets the benefit of selling Peloton's products on its website and earning revenue without the baggage of absorbing a business that has lost a whopping $1.8 billion over the last four quarters. Additionally, Peloton's financial situation is rather grim with just $879 million in cash on hand which is mostly a result of taking on $750 million in debt in May.
Peloton's Chief Financial Officer has commented that customers initiate 500,000 Peloton product searches every month on Amazon.com, reinforcing the positive impact this deal could have for his company. But it might be just as beneficial for Amazon, because every time a customer can't find what they're looking for on Amazon.com, it increases the likelihood that they will navigate to another website which costs the company more than just that one potential sale.
When a customer can find what they're looking for, Amazon not only wins the sale, but its artificial intelligence algorithms gain an opportunity to push other products into their view and potentially generate further revenue. It's estimated that these recommendation engines are responsible for 35% of Amazon's online sales, so being able to satisfy that monthly search volume for Peloton products will be a win for Amazon overall.
NASDAQ: AMZN
Key Data Points
Amazon stock is a buy now
Amazon is fresh off a strong, but mixed, second quarter of 2022. It suffered a net loss mainly as a result of its stake in electric vehicle maker Rivian Automotive (RIVN 0.63%), because shares in that company have fallen sharply recently.
But that speaks to Amazon's operational diversity. It offers investors a cross-section of the digital economy and it continues to drive innovation. Having multiple revenue streams insulates the company from external shocks like high inflation, which is currently putting pressure on consumers and, therefore, Amazon's e-commerce segment. But its cloud segment, driven by Amazon Web Services, still managed to grow by 33% year over year during the quarter.
Additionally, its relatively new advertising segment has delivered $33.9 billion in revenue over the last four quarters and remains an exciting opportunity going forward thanks to the company's valuable media assets, like the rights to the NFL's Thursday Night Football.
While the Peloton deal is exciting, Amazon is more than just an e-commerce company now and there's no shortage of reasons to own the stock.
