Connected-fitness company Peloton Interactive (PTON -0.97%) is releasing news at a torrid pace. It's hard to keep up with the updates regarding brick-and-mortar retail partnerships, business restructuring, and new exercise hardware.
But one news item stands out from this barrage. On Oct. 3, Peloton partnered with Hilton Worldwide Holdings (HLT -0.83%) to place Peloton bikes in all 5,400 Hilton-branded hotels.
This is the kind of deal the can help turn Peloton around fast. However, the devil is in the details -- details we don't have.
Peloton's partnership with Hilton
Every fitness center at Hilton hotels is getting at least one Peloton Bike as a result of the new partnership. The two companies aim to place the stationary bikes before the end of 2022.
For Peloton's connected-fitness subscribers (people who own hardware), of which there are about 3 million, the value proposition is clear; they'll be able to keep up with exercise routines even while traveling.
For Hilton customers, they'll be able to use Peloton Bikes even if they aren't Peloton subscribers. However, there's more to this partnership than just using a bike on a one-night hotel stay. Hilton's Honors members (the company's loyalty program) get the Peloton App free for 90 days starting now. And they'll get discounts on Peloton's exercise hardware.
Peloton's partnership with Hilton is massive for two reasons. First, it moves Peloton's dust-collecting bikes out of storage. Remember that Peloton's hardware revenue fell 30.5% in its fiscal 2022, which ended on June 30. While this was the company's second-best year ever for hardware sales, coming in 50% higher than its third-best year, management was over-ambitious in building up inventory. And that inventory has just been sitting.
PTON Inventories (Quarterly) data by YCharts
Storage costs are part of Peloton's rising inventory expenses. Therefore, moving the bikes into Hilton hotels will help ease this expense. Moreover, these bikes won't cost anything to make -- they're already made. As Peloton places them in 5,400 locations, it will finally realize cash flowing into the business.
The second reason this deal is massive for Peloton is because Hilton's loyalty program is huge. As of the second quarter of 2022, there were 139 million Hilton Honors members, and all of them get 90-day access to the Peloton App, which specializes in floor-based exercise routines that don't require hardware.
If just 5% of Hilton Honors members decide to become paying subscribers to the Peloton App after the 90-day trial expires, there would be roughly 7 million new Peloton digital subscribers. For perspective, that's more than the 6.9 million total members Peloton has right now.
In short, Peloton's deal with Hilton could improve hardware and subscription revenue at the same time.
A crucial six months for Peloton
Days after announcing its deal with Hilton, Peloton's new CEO Barry McCarthy came under fire for comments made to The Wall Street Journal that gave the impression the business had six months to prove it could be a stand-alone business. McCarthy later apologized, saying that he believed he would get Peloton to a place of sustainability within one year of joining the company, which is about six months from now.
McCarthy's comments came as Peloton laid off 500 employees, or about 12% of its workers. According to management, this is the last restructuring move needed to get to cash-flow positive by around the start of 2023.
However, investors shouldn't view this as a buying opportunity for Peloton stock quite yet. For starters, its partnership with Hilton could be a big deal with some important caveats. For example, the press release didn't mention any financials. There's no way for investors to know if Hilton is buying Peloton bikes at retail prices, wholesale prices, or something else. In short, its potential impact on cash flows is still unknown.
Moreover, it may be true that Peloton has restructured its business in a way to survive. That's good and McCarthy should be applauded for these steps. But where the company goes after stabilizing is another matter. And management hasn't said much about that because it's focused almost exclusively on reducing the cash burn it inherited.
Finally, it seems McCarthy wants to be a subscription business first and hardware sales will simply be a means of acquiring new users. If that's the case, Peloton stock may not be trading at a steep discount. It generated subscription revenue of $1.4 billion over the last 12 months and its market capitalization is $2.9 billion as of this writing. One could argue that's fair considering its membership recently dropped slightly quarter over quarter.
The partnership with Hilton is the most interesting development I've seen in a long time from Peloton. Even still, I'd wait a little longer before calling this a buying opportunity.
