Why Peloton Isn’t Going Anywhere Any Time Soon

Peloton (NASDAQ: PTON) has faced its fair share of troubles recently. So, what’s next for the exercise company? In this clip from “3 Minute Stocks Updates” on Motley Fool Live, recorded on Feb. 16, Motley Fool contributors Toby Bordelon and Brian Feroldi discuss why Peloton might be a damaged stock but not a damaged company.

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Toby Bordelon: Let’s talk about another fascinating company that we all know and love, or at least know. Peloton. Peloton has had a bit of a go of it recently. The CEO and co-founder, John Foley, stepped down who remains Executive Chairman. Interestingly, there have been no changes to the super majority voting stock, so he still basically controls the company. More on that in a second. The new CEO is Barry McCarthy. He’s the CEO and President. He was picked for the president title as well. He was going to join the board. Former CFO of Spotify (NYSE: SPOT), Netflix (NASDAQ: NFLX), so he’s got some venture capital experience. Former President William Lynch is also stepping down, but he is going to remain on the board as a Non-Executive Director. Mr. Foley said this is part of a month-long succession plan. I think that seems to make sense to me. I don’t think it was all of a sudden based on all of the bad news they were having before that. There are some additional board changes as well. One new board member comes from an AI company that was focused on supply chain management, which has been a problem for Peloton in the past. That’s interesting. He also had experience at Cisco (NASDAQ: CSCO) focusing on global supply chains. That’s some good experience to have. Another new board member comes from a brand-building company. Former Chief Marketer at Airbnb (NASDAQ: ABNB), former marketer in Coca-Cola (NYSE: KO). Marketing is also something they could use some help with so it’s good to see those additions, I think. They also have a cost-cutting program. They had a bunch of layoffs, about 20% of their workforce is fired, 2800 employees. They did get a year-long subscription on the way out of the door as a consolation price. They are winding down the development of Peloton Output Park in Ohio that they were going to be building. They say they’re not going to do it now. They’re going to sell the land by fiscal 2023. There was no reduction in content or in structures. They are expecting inventory to decline throughout the year as they better match with demand. In terms of earnings, their earnings were fairly good, They were alright. Revenue was actually up 6% year-over-year to $1.13 billion. It was up 41% and this is quarter-over-quarter, which is really solid. Still below its high-mark, but it’s nice to see revenue increasing sequentially after a couple of quarters of declining revenue. Gross margin, 24.7%. Their subscriptions are looking good. Connected fitness grew 66% to 2.77 million. Digital subscriptions up 38%, 860,000 there. Really nice to see over 6.6 million members. Really good there. I’ll show you some charts. Look at this. You can see the trend lines we’ve got going on here. You’ll see the connected fitness subscriptions continuing to go up. This is an issue. Workouts per sub is declining. They need to do some work there. But, the quarterly revenue, look at that. Finally, we reversed that trend going down. Really good stuff to see there, in terms of those trends. They did give us a net loss for the quarter versus net income last quarter. But, the churn is really good, 0.8% net monthly churn, 92%, 12-month retention mark. They’ve got a Peloton guide coming out with more products in the pipeline. Let’s finish up here. There were some acquisition rumors. We had a PE firm come out, before they changed CEs, slamming Peloton and John Foley, saying you’ve got to sell this company. They didn’t do that. There were rumors of potential buyers including Amazon (NASDAQ: AMZN) and others that have not materialized. But in McCarthy’s first letter to employees when he took over as CEO a couple of weeks ago. He did not sound like his goal was to sell the company. He sounded like he was in this for the long-haul and, yesterday, he doubled down on that. He said, “Company is not-for-sale anytime soon.” He went so far to say, “It would be irrational for me to move from my really nice home in California to New York if I were just going to sell this company in a couple of months.” He seems like he’s in it for the long term. I don’t think this company is going anywhere. It looks like they are making a go of it as an independent company for the foreseeable future.

Brian Feroldi: Peloton has had a bit of a rough go as of recently. When a stock is declining so rapidly and there’s so much negativity about it, one thing that I like to ask myself, is this a damaged stock and is the story damaged or is the business damaged? What do you say to that?

Bordelon: I would say for sure it’s a damaged stock right now but not a damaged company. The business seems OK to me, Brian. Retention numbers ensuring are still solid. They are still growing. They’re working on new products. They continue to add content. I got an email this morning about a new series of yoga programs that are rolling out. The narrative has changed absolutely and the new CEO Mr. McCarthy needs to get a handle on that. He needs to get control of that narrative again. Get people focused on the good stuff they’re doing. You can certainly argue about if the stock is overvalued or undervalued. We can have that debate but the business looks solid and I don’t think this company is going anywhere any time soon.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brian Feroldi owns Amazon and Netflix. Toby Bordelon owns Airbnb, Inc., Amazon, Netflix, and Peloton Interactive and has the following options: short May 2022 $300 puts on Netflix. The Motley Fool owns and recommends Airbnb, Inc., Amazon, Cisco Systems, Netflix, Peloton Interactive, and Spotify Technology. The Motley Fool has a disclosure policy.

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