Covid fitness stock Peloton’s investors feel the burn as it rips through money

At the height of the pandemic, as Wall Street banks scrambled to ease burnout among their overworked junior employees, some rolled out a gift that came to symbolise the era: Peloton bikes.

This week, Peloton, maker of high-end bikes and treadmills with big screens attached that allow people to take part in streamed video classes from home, was forced to turn to some of the most storied names on the street to keep itself in the saddle.

The company, which allowed millions to burn off calories and stress during lockdown but has become one of the biggest post-crisis stock market casualties, revealed on Tuesday it had has secured a $750 million (€723 million) credit line from Goldmans Sachs and JP Morgan to protect its balance sheet until it can stop haemorrhaging cash.

Loss

It came as the company reported a much-bigger-than-expected loss of $757 million (€727 million) for the three months through March, its financial third quarter. But the big sting for investors was the fact that it ripped through almost $747 million (€718 million) of cash during the period, the equivalent of the two previous quarters combined, as sales declined 23 per cent on the year and bikes and running machines piled up in warehouses.

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Peloton was sitting on $1.41 billion (€1.35 billion) of inventory at the end of March – up 50 per cent on the year.

The company, a cautionary tale of corporate hubris, missteps and an ill-founded belief that the Covid boon was the new normal, also guided analysts’ fourth-quarter sales forecasts downwards. Its shares plunged this week to a record low, leaving them down as much as 93 per cent from an all-time peak of $163 in January 2021.

Peloton was co-founded in 2013 by John Foley, a cycling enthusiast and former e-commerce executive with booksellers Barnes & Noble, who took his idea to a crowdfunding website and raised more than $307,332 (€295,238).

The company went public in an initial public offering in September 2019 that raised $1.2 billion (€1.1 billion) and valued the digital fitness company at more than $8 billion (€7.6 billion). While Peloton made one of the worst market debuts of that year – falling 11 per cent on its first day of trading – the stock would take off months later, when Covid-induced shutdowns pushed up sales of bikes, treadmills and online fitness subscriptions.

Value

The company’s market value rose more than 700 per cent in the space of nine months from March 2020 to $49 billion (€47 billion), propelling Foley, its chief executive, on to Forbes Billionaires list in April, 2021 with a net worth of $1.5 billion (€1.4 billion).

But, by then, cracks had already started to appear. In November 2020, Peloton warned that high demand and supply-chain constraints were resulting in long delays on customers getting hold of ordered bikes.

Foley was forced in May last year into an embarrassing recall of tens of thousands of Peloton treadmills, almost a month after being asked to do so by US consumer product safety authorities, after its Thread+ machines had caused dozens of injuries and the death of one child. The CEO conceded that he had “made a mistake” by fighting off the request.

Then there was the issue of runaway spending as the company raced to keep up with demand at all costs – and reports earlier this year of the company, which prided itself in taking back bikes with even a scratch when unpacked, covering up rust on machines manufacturing in Taiwan before sending them out to customers.

Foley stepped down as CEO in early February, weeks after activist investor Blackwells Capital called on the home-fitness company to fire him.

“To meet market demand we scaled our operations too rapidly and we overinvested in some areas of our business,” he said at the time.

“We own this. I own this and we’re holding ourselves accountable.” But not enough to shy away from the notion of becoming the company’s executive chairman.

Surprises

Peloton’s new chief executive of three months, Barry McCarthy, opened a shareholder letter this week with the lines: “Turnarounds are hard work. It’s intellectually challenging, emotionally draining, physically exhausting, and all consuming. It’s a full contact sport.”

On a call with analysts, McCarthy, a former chief financial officer with both Spotify and Netflix, said that of the host of surprises he's encountered since signing on to steady the ship, the biggest was the cash flow situation.

McCarthy’s plan is centred around cost-cutting, diversifying from being a seller of hardware to offering a rental programme, and broadening distribution to third-party retailers.

The share price has staged a tentative rally in the last few days from its lows, as analysts take a fresh look at Peloton’s prospects.

“We have argued that the [total addressable market] for hardware is huge, and that the argument that ‘everyone who wants a Peloton already has one’ does not take into account price elasticity nor international sales,” said Bernstein analyst Aneesha Sherman in a note.

Currently, Peloton bikes are only officially available for delivery in the US, UK, Canada, Australia and Germany.

Expanding internationally is easier said and done. At the moment, the company’s machines need to be installed when delivered. McCarthy talked on the call with analysts about redesigning its machines so that they could be delivered by FedEx. That will take time – and money. And it will also erase any remaining sheen of exclusivity around the products.

But first he’ll need to convince the markets that he can shift the inventory pile the company is sitting on – and return it to a situation where it tops bleeding cash.