There's a difficult dichotomy to address when you consider Peloton Interactive (PTON 3.06%). Its products are very cool, largely thanks to the technology that is wrapped around them. Still, to a large extent it's just exercise equipment. With the company recently announcing a big shake-up in the management ranks, investors may have to come to grips with the real problem Peloton faces.
Time to move on
In every company's life, there is a time when the founders are important and, if the business is to succeed over the long term, a time when the founders need to let go. For Peloton, it seems as if the time to let go is now, with founders John Foley and Hisao Kushi slated to have both left the company by early October.
That leaves recently anointed CEO Barry McCarthy to, essentially, do as he wishes with the company.
There's no question that having a freer hand will be a benefit for McCarthy as he looks to make changes. Change, however, has been notable since he took the helm in early February. For example, there have been a number of key management changes, over and above the founders exiting the company.
Peloton also announced plans to exit manufacturing, instead outsourcing this task to a key partner, so Peloton can focus on technology and content. And it announced a sales agreement with Amazon.
It's too soon to tell whether any of these decisions are good or bad. However, none of the changes seems inherently problematic or irreparable should a mistake have been made. And with the stock down some 70% in 2022 and over 90% from its 2021 highs, you can easily argue that something had to be changed if only to appease Wall Street.
The problem is that there is one big thing about the company that can't easily be altered.
The old is new again, for a while
The impressive thing about Peloton is that the company managed to take something old and turn it into a hot commodity. That's basically what Sodastream did, too, as it took a simple soda siphon, which had been around for a long time, and modernized it with some fancy-looking bells and whistles.
At the end of the day, however, Sodastream was a narrowly focused company that ended up selling itself to beverage and snack giant PepsiCo. Sodastream's product went through a fad phase, and then, when the dust settled down, it just didn't resonate enough to support a stand-alone company. Becoming part of a larger consumer staples company with a material beverage business made logical sense.
At its core, Peloton makes exercise equipment. That's nothing new, and it's not very exciting. History is replete with exercise fads, often tied to specific products. Take, for example, those old-fashioned exercise machines that jiggled a person's middle with a big belt. Or how about the Thigh Master, a spring-loaded contraption you squeeze between your legs popularized by Suzanne Somers?
What Peloton pulled off was adding technology to turn old exercise equipment into an exciting product again. And the technology and content Peloton created is, undoubtedly, cool. Being able to attend live classes from home, compare performance against others in the class, and participate in old classes as if they were live is pretty neat.
But it doesn't change the nature of human behavior as it relates to exercise equipment, which is often purchased with the best of intentions but then, slowly, left behind as newer interests arise or boredom sets in. In Peloton's case, average monthly workouts among active subscribers fell 26% year over year in the fiscal fourth quarter of 2022.
To be fair, the company managed to increase its connected fitness subscription count by 27% year over year in the fiscal fourth quarter. But the number was, essentially, unchanged sequentially between the third and fourth quarters of the year. That could be a sign of consumer fatigue with the product, noting that competitors have brought out alternative, and often cheaper, products with similar features. In a saturated market, it is harder to stand out.
Before stepping into Peloton, investors need to ask if this company is really capable of standing on its own. Even if it continues to create great content and interesting technology, it is still wrapping that around boring old exercise equipment. On this front, it is interesting to note that Mirror was acquired by Lululemon in 2020. This product turned a mirror into something of a personal trainer. Cool, but given the sale of the business, not capable of supporting a stand-alone company.
Is the final change going to be a sale?
There's no shortage of companies with great products that, eventually, wound up part of a larger organization (Sodastream and Mirror are just two). While the changes taking shape at Peloton are newsworthy and exciting in many ways, they don't seem likely to alter the one big issue dogging the company. No matter how wonderful the technology and content, Peloton still just sells exercise equipment.
However, with the founders out and a new CEO making notable changes, it wouldn't be shocking if Peloton followed Sodastream and Mirror to partner up with a larger company. That's really not a good enough reason to buy the stock for most investors. But if the company doesn't start turning a profit, it may end up being the best option available.
Indeed, until Peloton's financial results are sustainably better, all but the most aggressive investors will likely be better off investing their hard-earned savings elsewhere.