Peloton (PTON 4.42%) stock skyrocketed after the company's digitally connected exercise equipment became extremely popular in the early phases of the pandemic. The company had reported a multiyear streak of triple-digit revenue growth in the lead-up to 2020, which fueled the stock's 434% gain that year.
But investors and consumers quickly moved on to newer and more promising fads. Peloton's inability to sustain its pandemic-era growth has resulted in shares plummeting 97% from their 2021 peak. The next five years are likely to remain an uphill climb for the company, though its story may actually end much sooner.
The rise and fall of Peloton
It's important to understand Peloton's connected exercise equipment became popular for good reasons. While its exercise bikes and treadmills aren't necessarily groundbreaking, their interactive features, such as the ability to connect to online classes, have become standard in the fitness industry. During a time when social distancing and isolation were the norm, the ability to take live digital classes and "compete" with other Peloton users proved very attractive to consumers.
At the height of the company's popularity, fitness enthusiasts found themselves waiting weeks or months for their Peloton equipment as the company worked furiously to meet demand. But the conditions that set the stage for Peloton's incredible rise were only temporary.
In the end, competition entered the market with similar, digitally-focused products, and the world opened back up as the pandemic abated. As demand fell, Peloton found it had overextended with its ambitious expansion plans, and fiscal 2022 losses soared to $2.8 billion.
Since then, under new leadership, the company has had multiple rounds of layoffs as part of a broader effort to rein in expenses. Management has also launched new initiatives, including major retail partnerships, subscription-based access to its exercise equipment, and more.
Data by YCharts.
The current situation and what comes next
In its fiscal 2024 third quarter, equipment sales continued to decline with connected fitness products revenue down 14% year over year. But its much higher-margin subscription revenue climbed 3% as its connected fitness subscriber base (the users tied to Peloton's equipment) managed to remain flat year over year at 3.1 million.
However, the number of paid-app subscribers (standalone users without Peloton equipment) fell 21% year over year to 0.67 million. This app-only segment has turned out to be a dud with subscriptions having peaked at 0.98 million in fiscal 2022. This likely contributed to CEO Barry McCarthy stepping down earlier this month. Along with its fiscal third quarter results, Peloton announced renewed plans to cut costs and improve its financial results.
In light of the company's ongoing struggles, rumors are circulating that private equity buyers are looking to acquire Peloton, leading to the stock to rally 20% since May 7. With its strong brand name but notable lack of direction, such a buyout could actually be the best outcome for the company.
What does this mean for investors?
These private-equity firms aren't stepping in here with the intention of easing the pain of long-suffering shareholders who are likely staring down significant paper losses. They are trying to buy a strong brand on the cheap, and given Peloton's deteriorating business results and continued losses, the company fits that bill. Even with a generous buyout premium, many current shareholders won't recoup their losses.
But in the case such a deal doesn't materialize, that could be an even worse outcome. With current leadership on the hunt for another new CEO to right the ship, there are far more questions than answers regarding what direction Peloton takes going forward.
Meanwhile, there is little indication Peloton can overcome the intense competition in its industry and reverse the falling demand for its premium equipment. Looking ahead, it probably won't take five years to figure out which way its story goes from here, but regardless of the direction it takes, investors should watch from the sidelines.
