How Peloton Tumbled From a Rapid-Growth Pick to a Value Play

In this clip from “The Health & Fitness Show” on Motley Fool Live, recorded on Feb. 11, Motley Fool contributors Sanmeet Deo, Brian Orelli, and Meilin Quinn discuss the news that Peloton (NASDAQ: PTON) is cutting both jobs and production and analyzes what might've gone wrong with the exercise giant's planning and positioning ahead of its anticipated slowdown.

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Sanmeet Deo: Another day of news with Peloton. I think it was yesterday, am I right? The CEO, John Foley, decided to step down. He is going to become the executive chairman, and a new CEO was put in place, Brian McCarthy, who was a former CFO of Spotify (NYSE: SPOT) and Netflix (NASDAQ: NFLX). He will be taking over. They're also planning on cutting 2,800 jobs, which is huge, but all of those jobs will be corporate-related jobs, not any of the fitness instructors or the content creator types. They're going through a major restructuring and overhaul in terms of their management team as well as their cost structure. I think they're going to stop production or stop work on the Ohio plant, which will save money. I also saw that the CEO of Precor has decided to leave. He led the acquisition of Precor by Peloton and then stayed on with Peloton to lead the commercial aspect of Peloton. Now, he is leaving and I think he decided that he is going to be just an investor in the industry. I think he invested in supposedly a boutique fitness franchise in Europe. He's moving his family to Portugal so that's kind of nice. [laughs] You just take your family to Portugal after all of that. But yeah, lots going on at Peloton.

Brian Orelli: They didn't rightsize. They had to ramp up for the pandemic and they just didn't hit the right spot. What do you think the issue is?

Meilin Quinn: It sounds like they just simply guessed wrong about how many people would be buying its products post-pandemic when so much demand was pulled forward during the coronavirus pandemic.

Deo: I was talking about it somewhere before. One of the common themes with some of the “pandemic plays” or “pandemic companies” is that a lot of pull-forward happen in their revenues and their business and the trends in their business that really significantly enhanced their business for that crazy year, year-and-a-half or two that we were in the deep part of the pandemic, and coming out of that became a much bigger challenge. Like, rightsizing the business and figuring out that this uber growth that they're going through is not going to last and making sure that they position themselves well for them. I think Peloton definitely didn't position themselves well. They were spending a lot of money on manufacturing and building a factory for US-based manufacturing, which is great because they were investing in their business, but they misunderstood the impact or the magnitude of the slowdown that was about to come. I think they knew a slowdown would occur, but they didn't know the magnitude of which it would occur and the speed at which it would occur. All of these things with Peloton that's been happening, outside of some of the safety issues that they went through earlier that was a big challenge, all of this stuff has been in the course of a few months where their slowdown just hit hard. When they're cutting staff, reducing the cost structure, stop building factory, they apparently need to preserve cash. It's gone from a rapid growth company to a value company in the parlance of investing terminology.

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Brian Orelli, PhD has no position in any of the stocks mentioned. Meilin Quinn has no position in any of the stocks mentioned. Sanmeet Deo owns Netflix and Peloton Interactive. The Motley Fool owns and recommends Netflix, Peloton Interactive, and Spotify Technology. The Motley Fool has a disclosure policy.

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