On Sept. 12, Peloton Interactive's (PTON -0.98%) new management announced a bombshell development: Peloton co-founders John Foley and Hisao Kushi are completely out at the connected-fitness company.
Shareholders certainly want to know whether this news is good or bad. But frankly, this development could go either way. As we'll see, there are reasons why this may not be good for investors. But I'm leaning toward it being a long-term positive, which I'll explain.
Why Foley's exit could be bad
In Peloton's official press release, Foley was praised as a "visionary" who played an integral role -- not just at Peloton but in redefining the home-fitness experience at large. The simple idea of combining at-home exercise equipment with in-studio instructor videos was a novel approach when Peloton started. But it's since been emulated by any exercise-hardware company that wants to keep with the times. Foley helped start the trend.
A visionary founding CEO is something that's often perceived as an important component of a successful business. Investors love it, and there's even an exchange-traded fund (ETF) built around just this idea. It makes sense. Who cares more about a company than a founder? And who's more likely to see where an industry is going than the visionary who foresaw where the industry is today? Peloton has potentially lost this now that Foley and Kushi are gone.
Moreover, Foley has plans that could motivate him to sell his Peloton stock. From the official Peloton press release, Foley said: "Now it is time for me to start a new professional chapter. I have passion for building companies and creating great teams, and I am excited to do that again in a new space." In other words, Foley is starting a new company and could need money to get it off the ground.
Foley owns both directly and indirectly over 6.6 million shares of Peloton, which he could liquidate to help fund his next venture. For his part, Kushi owns far less than Foley, with around one million shares owned indirectly. But he could also potentially look to sell. (These figures are for shares and don't include options and restricted stock units.)
Foley and Kushi selling their stakes is more of a near-term risk for Peloton stock. It could put downward pressure on shares. But the bigger risk for Peloton long term is losing the vision and charisma that made it into the beloved brand it is today.
Why this still might be good for shareholders
Foley succeeded as a visionary. But I believe it's fair to say Peloton was mismanaged after coming public, and that's the primary reason the stock is down more than 90% from its high. This is why having the company under completely new management, without even the presence of the old, could be a good thing.
For example, under Foley's leadership, Peloton ramped up inventory production right as its growth was starting to slow. This has created quite a dilemma for new CEO Barry McCarthy. In the past couple of quarters, McCarthy has closed company-owned manufacturing, outsourced (and slowed) new inventory production, and is trying to come up with creative solutions to stimulate demand for its products. But it's still got a ways to go to undo the damage and get back to positive cash flow.
PTON Inventories (Quarterly) data by YCharts.
However, I wouldn't be too hard on Foley -- being a charismatic visionary and being a numbers-crunching manager are different skills. Remember: It only shipped its first bike in 2014, whereas just five years later, it was already having its initial public offering (IPO) at an $8 billion valuation. The velocity of that growth didn't allow the managerial team much time for development.
By contrast, McCarthy arrives with plenty of experience as a manager from Netflix and Spotify, which is why having Peloton's co-founders completely out of the picture could be a good thing. McCarthy is foregoing growth opportunities (previous management probably wouldn't have) because he understands the importance of positive cash flow. That's what the company needs right now.
With Foley and Kushi gone, Peloton's new leadership team can make the hard decisions and do what needs to be done -- whatever that may be. And while it hasn't said anything, that could potentially include selling the company. Maybe Peloton makes more sense as part of a larger company.
Separate from this discussion is what this all means for Peloton stock. If Peloton can convert its dust-collecting inventory into positive cash flow in 2023, then I would bet further downside is limited. And to be fair, Peloton is making progress toward this goal, albeit with plenty more to go.
However, for market-beating returns, Peloton's new leaders will also need to grow the company. And for now, while possible, that outcome is far from certain.
