The future of struggling connected fitness equipment maker Peloton Interactive (PTON -2.24%) seems very much in doubt -- not because its executive chairman and co-founder, John Foley, just resigned from the company, but rather because it's really just a small, niche business that doesn't deserve its market valuation.
High-priced workout equipment has a very narrow channel of consumer appeal, which is why Peloton is leaning into its subscription business, though that ultimately makes Peloton little more than a glorified workout app. It's unlikely investors will want to pay a premium for such small-stakes operations, though with Foley's exit, it could also position Peloton for a sale.
Image source: Peloton Interactive.
A clean sweep
The resignation of Foley and co-founder Hisao Kushi represents a final sweep of the old guard that ran the fitness equipment company.
Earlier this year when Foley stepped down as CEO to assume the executive chairman role and Peloton's president, William Lynch, also left the company, there was speculation the moves might be setting up the fitness company for a sale. But since Foley owns a supermajority of Peloton's class B stock that has a 20-to-1 voting ratio over class A shares, it suggested he wasn't about to sell his company.
Besides, former Netflix executive Barry McCarthy came out of retirement to take on the CEO position and said he wasn't joining a company to simply sell it. He wanted to turn it around.
But with Foley and the rest of Peloton's founders now completely out, it's quite possible Foley could sell his shares or at least be much more agreeable to a company sale. And McCarthy told a Goldman Sachs conference on the day the resignations were announced that his only goal is to get Peloton back on its feet and then he's heading back to retirement again.
While it's clear Peloton isn't fixed yet, it might not be that much longer before McCarthy declares "mission accomplished" and moves on. He already says he raised prices on the exercise equipment because Peloton isn't on life support anymore and he expects the company to achieve sustained positive free cash flow by June 2023. That could mean there's less than a year's time before Peloton is seen as shipshape for sale.
Workout classes are the future
There are hints that is the plan. McCarthy is pushing Peloton's digital offerings harder. While he opened a storefront on Amazon for equipment and accessories, a key initiative for getting Peloton back on track is expanding the availability of its online classes.
Originally accessible for buyers of Peloton workout equipment, the classes were subsequently offered as a stand-alone subscription, and now McCarthy sees an opportunity in offering them for use on competitors' equipment. It's an extension born of necessity.
Peloton has about 3 million connected fitness subscribers, but their growth has stalled, and those who maintain a subscription are tuning into them less. The total number of workouts done by members plunged 20% year over year last quarter, and the average number of monthly workouts per connected fitness subscription dropped 21%.
Average net monthly connected fitness churn also nearly doubled both sequentially and year over year, an indication that more Peloton owners are no longer using their equipment and are cancelling the subscription. Peloton needs a larger universe of customers to tap into particularly if it's to look more attractive to a potential buyer like Amazon or Apple, as was originally speculated.
A diminished outlook
During the pandemic boom, the equipment maker believed becoming vertically integrated in the manufacture, sale, and distribution of its equipment was essential to growing the business. The post-pandemic lockdown bust now finds Peloton rapidly exiting the hardware channels, in favor of the lower cost, higher margin workout classes.
That might stanch Peloton's financial bleeding, but it also makes it more of an app-centric business than a fitness equipment company. That's a fine business to run (or sell), but it's not a model for which investors would be willing to pay such a high premium for its stock.
