Is Peloton (PTON) stock a good buy?

In this article, we review Peloton stock to determine if it’s a good buy, sell, or hold.

Peloton is an exercise equipment and media company based in New York. The company was founded by John Foley, Graham Stanton, Hisao Kushi, Tom Cortese, and Yony Feng.

• John Foley has served as CEO
• Tom Cortese has served as Chief Product Officer
• Hisao Kushi has served as Chief Legal Officer
• Yony Feng has served as CTO
• Graham Stanton has served as Senior VP and Advisor and left the company in 2020.

Table of Contents

• Tykr Rating
• Peloton Business Model
• Peloton Company History
• Peloton News
• Peloton Competition
• Peloton 4Ms
• Peloton Financials
• Is Peloton Stock a good buy?

Tykr Rating

• Summary:  Overpriced
• Score:  5/20
• MOS:  1%
• Share Price:  $37
• Sticker Price:  $37

Peloton Business Model

Peloton is known for its internet-connected stationary bicycles and treadmills. The company sells hardware, membership plans, and apparel.

Hardware

• Bicycles: Range between $1,495 and $2,035
• Treadmills: Range between $2,495 and $3,115

Memberships

• All-Access: $39/month – One membership per household allows you to create multiple profiles. This membership integrates with the bikes and treadmills.
• Peloton App: $12.99/month – No hardware required. Gain access to thousands of classes and use your own equipment.

Apparel

• Peloton sells yoga pants, running pants, hoodies, workout shorts, cycling shorts, and a variety of workout clothing. 

Peloton Company History

John Foley, while working at Barnes & Noble, pitched the Peloton business model to his co-worker Tom Cortese. The idea was people who have limited time to join a gym or cycling class can still take part in a group workout experience in the comfort of their own home through connective technology. Foley and Cortese raised $400K in February of 2012 and another $3.5M in December of 2012.

• Tread+ was added to the company in 2018.
• They expanded to the UK and Canada in 2018.
• In March of 2019 they were sued by the National Music Publishers Associates for using copyrighted music in their videos. Customers criticized these changes as they affected the quality of its product experience. The lawsuit was settled for $300M. The landslide of bad news was just getting started.
• In September of 2019 the company filed for IPO, raising $1.16B.
• In November of 2019, the company released a new holiday commercial titled “The Gift That Gives Back” where a wife, played by actress Monica Ruiz, receives a Peloton from her husband. The video plot is a reflection over a year and at the end of the year the message is “I didn’t realize how much this would change me.” The video received massive criticism as viewers proclaimed the plot implied the husband was dissatisfied with his wife’s physical appearance. Peloton defended the campaign stating the plot is meant to inspire wellness. The defense didn’t land well and negative perceptions of the company continued. To make light of the situation, Ryan Reynolds hired the Peloton wife, played by Ruiz, for his Aviation Gin company. She was the key role in a mockery advertisement titled “The Gift That Doesn’t Give Back.” Nice play, Ryan.
• Peloton sales significantly increased in 2020 due to Covid-19. Unfortunately, the high demand caused shipping delays where customers received their products months late, leading to an unexpected increase in order cancellations.
• In December of 2020, the company made a $100M investment in shipping solutions to accelerate ship times.
• In December of 2020, the company announced its plans to acquire Precor USA for $420M. This acquisition would provide Peloton with 625,000 square feet of manufacturing space in Whitsett, NC and Woodinville, WA.
• In May of 2021, the US Consumer Product Safety Commission warned people with children and pets to stop using the Tread+ model after one child died and almost 40 others were injured including fractured bones. Peloton initially rejected the Consumer Product Safety Commissions’s request to recall the product and instead warned parents to keep children and pets away from the treadmill. The perspective of this response was seen as dismissive. Peloton’s second response was the company offering to move the treadmill to a room where children and pets do not enter, free of charge. Are you kidding? I’m not the only one who thought this was a joke, right? Both responses were seen as poor leadership calls and the share price continued to fall.
• In December of 2021, an episode of Sex and the City reboot And Just Like That… aired and the character Mr. Big collapsed and died after riding a Peloton bike. The day after the episode aired, Peloton shares fell 11%.
• In January of 2022 Peloton paused production after greatly increased demand during the early stages of Covid had slackened, leaving the company with a glut of bikes and treadmills. Peloton shares dropped 80% from their pandemic high 12 months earlier.

The history of the company is ripe with negativity. On top of that, the recent news doesn’t get any better.

Peloton News

This article from theverge.com states that Peloton CEO John Foley has stepped down. The company also announced they are eliminating 2,800 jobs, are scaling back marketing, and are ending North American manufacturing. The primary cause of Peloton’s massive share pullback is a result of the company overextending itself and failing to see weaker demand once gyms re-opened. As stated by investor Blackwell Capital, “Foley is fired for steering Peloton off the proverbial cliff.” His poor leadership decisions include failure to cooperate with the Consumer Product Safety Commission on treadmill recalls, he hired his wife as VP of apparel, making poor real estate investments, failing to anticipate consumer demand, and “upending the product roadmap he himself authored”. 

This article from businessinsider.com states that Peloton is laying off 2,800 employees but its instructors, who reportedly can make $500K a year, are safe. On their website, it looks like there are over 55 high-paid instructors. Based on insight from Bloomberg, Peloton’s instructors are full-time employees with fixed salaries and incentive compensations that can sometimes be 12X higher than the average employee. The job cuts are expected to save $800M a year. When you run that math, $800M divided by 2,800, equates to an average salary of $285K. My question is, what are the roles of these associates? Are they all Director level and up? Are there 2,000 VPs in the company attending meetings to discuss the previous meeting and plan for the next meeting? Or are they editing each other’s PowerPoints by adding pretty fonts and heart-warming colors? What the hell is going on here? I see extensive middle-management bloat with highly generous compensation packages. 

This article from finance.yahoo.com states that Peloton is losing a highly influential executive. Peloton acquired Precor in December of 2020 and Precor CEO, Rob Barker, stepped into the role of VP of Commercial at Peloton. Prior to the acquisition, Barker spent 27 years climbing through the ranks of Precor. His understanding of manufacturing and supply chain was obviously overlooked and now his expertise is leaving the company. Barker stated that he will serve as an advisor for the fitness industry.

This article from latimes.com states that Peloton may be showing interest in selling the entire company. One obvious reason includes an exit to allow shareholders to cash out. As Kenny Rogers best said, you should know when to hold em’ and know when to fold em’. Now might be the best time to walk away. Some of the speculated buyers of Peloton include Amazon, Apple, and Nike. Since discussions have occurred, the share price has increased by 54% in the last week. This most likely won’t sustain if an acquisition falls through. For those of you who are investors, watch the news closely over the coming months or set your trailing stop losses in your broker. This stock could head back to $24.

This article from cnbc.com states that laid-off employees crashed a meeting between the current and former CEO’s. Some of the chat comments included “I’m selling all my Peloton apparel to pay my bills” while another comment said “This is awfully tone-deaf.” The article goes on to say the new CEO, Barry McCarthy has a very difficult road ahead. One objective he’s faced with is getting the company back to profitability but a key milestone that needs to be achieved first is boosting employee morale. At the moment the company appears to be a dismal place to work. Keeping the employees it currently has might be enough of a challenge on its own.

This article from cnbc.com highlights some positivity with the company. They state that bike and tread sales fell by 17% but subscription revenue grew by 94%. Connected fitness sales accounted for 62% of Peloton’s business. Its entire user base is now up to 6.2 million. 

Peloton Competition

The fitness industry has been highly competitive since the 1980s. There is a low barrier to entry for both equipment and gurus. Gurus have come and gone over time. One minute they’re hot, the next minute they’re not. From late-night infomercials to VHS tapes, to DVDs, and finally leading up to Youtube. Some of the hot names from the 80s included Jane Fonda, Suzanne Somers, and Richard Simmons. In the 90s you had Denise Austin, Tony Little, and Billy Blanks. In the 2000s you had Jillian Michaels, Bob Harper, and Tony Horton. 

Now today, anyone with a tight waist and a pretty face can become a Youtube or Instagram fitness influencer. No certifications. No credentials. No past experience. Set up your camera, put on your makeup, and use your best southern California accent for the girls and for the guys, just emulate your best version of a gym-bro and you’re there. 

To digress, I can’t make too much fun. I’ve been an athlete since age 8 and these days I enjoy CrossFit. Although I love fitness, I’m not 220 pounds with 7% body fat. No shirtless selfies in the public gym for this guy!

Getting access to influencers has always been cheap and the investment in equipment has never been far behind. When one company would release a product, it seemed like another dozen competitors would enter the market soon after. Some of the hottest fitness equipment of the past have now become comedic references in movies. Deadpool mentioned Shake Weight and Avengers Infinity War mentioned Bowflex. Don’t forget about equipment/trends including Nordic Track, Jazzercise, Tae Bo, Thigh Master, and more. These were all hot at one time but have since become punchlines. We’re now starting to see this with Peloton.

Regarding Peloton’s connective technology, it was certainly innovative in 2012 but not sustainably competitive. Here is a list of competitive products some would argue are superior to Peloton.

• Bowflex VeloCore – $1,699 – This bike includes connective technology and a membership where you may join on-demand classes and virtual coaching. The membership also brings Netflix, Hulu, Amazon Prime, and Disney+ to the console screen. The bike also includes a feature that Peloton does not offer which is “leaning mode”. Riders may tilt which simulates a real ride and engages more of your arms and core.
• NordicTrack Commercial S22i Studio Cycle – $1,499 – This bike includes connective technology but the first-year membership is free. How does Peloton compete with that? The fitness industry can sometimes be a race to the bottom. Anytime Fitness memberships can be $40/month whereas Planet Fitness is $10/month. 
• Echelon EX-5s – $1,499 – This bike includes connective technology and it’s just 123 pounds which makes it extremely easy to move around the home.
• MYX Plus – $1,599 – This bike includes connective technology. It also includes a six-piece weight set (with light, medium, and heavy weight ranges), a kettlebell, exercise mat, foam roller, and resistance band.
• Keiser M3i Indoor Cycle – $2,450 – This bike includes connective technology and it’s just 85 pounds, making it even easier to move than the Echelon EX-5s.

Here is a list of the most popular fitness subscription apps.

• Apple Fitness Plus – $10/month
• Fitbod – $13/month
• Daily Burn – $19/month
• CorePower On Demand – $19/month
• Glo – $18/month
• Aaptiv – $15/month
• Barre3 – $29/month
• Crunch Live – $10/month

These are just a few of the most popular fitness apps. I did a quick google search and there are apparently 84 million health and fitness-related apps available today. Why would anyone want to enter this space? Unless you have something completely game-changing to introduce to the world, your march forward could be an uphill battle.

Peloton 4Ms

MOS (Margin of Safety): The financials are in awful shape. A score of 5/20 and a MOS of 1% tell us to run for the hills. I don’t see too many stocks with a score of 5/20. When you take a closer look at the Income Statment, you can see the Revenues did increase but the Net Income, EPS, and Free Cash Flow are nose-diving. On the financials alone, this stock is a major risk.

Meaning: Fitness has been highly saturated for the last 40 years. If you create a product, it had better be highly innovative to achieve any short-term growth. Regarding long-term growth, that’s a near-impossible feat. The fitness-related brands that have sustained over time tend to be apparel companies like Nike, Lululemon, and Adidas. When it comes to products or apps, the companies that do best are already part of a larger brand such as Apple’s Fitness app.

Moat: There is no moat. There are too many competitors in the hardware and subscription space. One would argue that both the products and the subscription services provide a very similar experience. Plus, it’s hard to compete with Apple as they are world-class with connective technology.

Management: I see some red flags with management as well. When looking at the founder’s LinkedIn profiles, none of them have any manufacturing and supply chain experience with hardware equipment. This is highly critical if a core part of your business includes bikes and treadmills. A Peloton bike can weigh 135 lbs and a treadmill can weigh 300 lbs. This is important to highlight because one unit consists of extensive metal and plastic. When a company has a strong demand for hardware, it’s wise to have several leaders in place who understand sourcing, manufacturing, supply chain, and global logistics. This could be a major reason why the company made poor decisions in these areas. Foley has given up the CEO role and will become executive chair. The new CEO is Barry McCarthy, a former CFO at Spotify and Netflix. McCarthy has extensive experience with venture capital and has served as a board member at Chegg, Rent The Runway, NatureBox, Eventbrite, and Pandora. If the company wants to position itself to sell, McCarthy is the right guy to execute that vision. I don’t see a history of manufacturing or supply chain which tells me the hardware side of the company isn’t the focus right now. Shareholders should pay close attention to McCarthy at this time.

Peloton Financials

Now let’s take a look at the financials to get us closer to determining if Peloton stock is a good buy. A good value investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

Revenue (Found on the Income Statement)

• 2018:  $435M
• 2019:  $915M
• 2020:  $1.8B
• 2021:  $4B
• Revenue has increased significantly in 2021.

Net Income (Found on the Income Statement)

• 2018:  -$47M
• 2019:  -$195M
• 2020:  -$71M
• 2021:  -$189M
• Net Income has significantly decreased in 2021.

EPS (Found on the Income Statement)

• 2018:  -.21
• 2019:  -.84
• 2020:  -.32
• 2021:  -.64
• EPS has significantly decreased in 2021.

Free Cash Flow (Found on the Cash Flow Statement)

• 2018:  $21M
• 2019:  -$191M
• 2020:  $220M
• 2021:  -$491M
• Free Cash Flow has significantly decreased in 2021.

Total Assets (Found on the Balance Sheet)

• 2018:  $271M
• 2019:  $864M
• 2020:  $2.9B
• 2021:  $4.4B
• Total Assets have increased which is a good sign.

Total Liabilities (Found on the Balance Sheet)

• 2018:  $586M
• 2019:  $462M
• 2020:  $1.3B
• 2021:  $2.7B
• The Total Liabilities have increased which is a bad sign.

Total Debt (Found on the Balance Sheet)

• 2018:  $0
• 2019:  $0
• 2020:  $555M
• 2021:  $1.5B
• The debt has increased in 2021. This is also a bad sign.

Total Equity (Found on the Balance Sheet)

• 2017:  -$315M
• 2018:  $402M
• 2019:  $1.6B
• 2020:  $1.7B
• The Total Equity is increasing slowly.

Is Peloton (PTON) stock a good buy?

If you’re not a shareholder in Peloton, you should probably keep looking for other stocks. If you are a shareholder, the long-term vision on this stock is not looking good. Although the subscription component of the business is growing, there is no moat. There are too many competitors in the fitness industry and for that reason, this stock could be facing a difficult road ahead. Knowing that McCarthy was brought in to lead as CEO, tells us an acquisition may occur in the future. 

From my perspective, I would strongly question what is being bought. I don’t see value in the hardware side of the business. The one aspect of the business with value in my eyes is the 6.2 million subscribers. If an acquisition of Peloton will occur, it’ll most likely be from a company that already has fitness subscribers (Apple) or a company that is looking for fitness subscribers (Nike). We’ll see how this story unfolds in 2022.

If I were a shareholder, and I’m in the green, I would exit at this time. On the other hand, if I were in the negative, I would wait to see if an acquisition occurs. When a company is potentially looking to be acquired, its share price can increase and the company conducting the acquisition can see its share price decrease. In this circumstance, there could be a little pump to help you get closer to your cost basis (average buy price) so you minimize your losses (or maybe even take a profit). Good luck on this journey ahead.

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