Connected-fitness company Peloton (PTON +1.86%) has been attempting to turn itself around since the beginning of 2022. The company made the near-fatal error of assuming that pandemic-era demand for its pricey exercise bikes would persist. It did not. Massive losses ensued.
Under CEO Barry McCarthy, the company has slowed the bleeding. Free cash flow was a loss of just $55.3 million in the third quarter of fiscal 2023, which ended March 31. That's vastly better than a loss of $746.7 million in the prior-year period.
But slowing the bleeding and returning to growth and profitability are two very different things. Under McCarthy, Peloton set a stretch goal of eventually reaching 100 million members. Peloton certainly isn't going to sell 100 million multi-thousand-dollar home exercise bikes, so much of this growth would have to come from subscription offerings not tied to hardware. The problem was that Peloton's brand and marketing put the hardware front and center.
NASDAQ: PTON
Key Data Points
Changing the story
Peloton is relaunching its brand and rolling out new tiers of its digital subscription service that aren't tied to its hardware. The company is positioning itself as a fitness brand for everyone, not just those willing and able to shell out thousands for home exercise equipment.
There are now three subscription tiers that don't require any Peloton equipment. Peloton App Free is the company's new free offering, giving users access to around 50 recorded classes at no cost. This free tier may help get people in the door who have previously written off Peloton entirely.
Peloton App One is the next level up from the free tier, priced at $12.99 per month. That fee gets users thousands of recorded classes as well as live classes and challenges. For $24 per month, users can move up the Peloton App+ tier, which buys them access to exclusive classes, cadence tracking with compatible equipment, and more equipment-based classes.
McCarthy noted in his third quarter letter to shareholders that Peloton had become known as "an at-home bike company for fitness enthusiasts." The market for such a thing in the post-pandemic world is only so big, as Peloton has painfully learned over the past couple of years.
Peloton's talk of shooting for 100 million members and its actual strategy now line up for the first time since the turnaround began.
Is Peloton stock a buy?
While Peloton's shift away from centering its business on expensive exercise equipment is a positive, the stock still looks risky. Peloton is valued at about $2.6 billion. The subscription business has an annual revenue run rate of about $1.7 billion, but a big chunk of that is tied to subscriptions that are required for hardware owners. The hardware business is a money pit with a negative gross margin.
In the world of fitness apps, Peloton is going head-to-head with Apple's Fitness+. Not only is Fitness+ cheaper at $9.99 per month, but it's deeply integrated into Apple's ecosystem of devices. Fitness+ doesn't have to be a big moneymaker for Apple, it just needs to help sell iPhones and Apple Watches. There's also an endless number of free fitness videos on YouTube, which will likely be enough for many people.
It's not clear whether Peloton's brand means much to anyone not interested in at-home exercise bikes and treadmills. The rebranding is meant to fix this, but it will likely be an uphill battle. I wouldn't call Peloton stock a buy, but at the very least, the company now has a coherent strategy and a non-zero chance of making a comeback.
