LAS VEGAS, NV – JANUARY 11: Maggie Lu uses a Peloton Tread treadmill during CES 2018 at the Las … [+]
Back in September 2019, I advocated against buying into Peloton’s IPO.
John Foley, its CEO — who gets 20 votes to every common shareholder’s one — has admitted he erred when Peloton
Since peaking in December, Peloton shares have fallen 50%. Are those shares now selling at a bargain basement price?
I see three reasons that this stock is not a bargain:
- Potential Loss of At Least 12% Of Peloton’s Revenue
- Fizzling Demand for New Exercise Bikes
- Immovable CEO
(I have no financial interest in the securities mentioned in this post).
Peloton’s Tread+ Recall
On May 5, Peloton agreed to recall its treadmills after Foley “apologized for Peloton’s initial refusal to comply with federal safety regulators who pushed for the action weeks ago. The exercise-equipment maker also said it was halting sales of its Tread+ treadmill model,” according to the Journal.
Foley apologized for stalling. As he said in a statement, “I want to be clear, Peloton made a mistake in our initial response to the Consumer Product Safety Commission’s (CPSC) request that we recall the Tread+. “We should have engaged more productively with them from the outset.”
In mid-April, the CPSC urged Tread+ users with young children or pets to stop using the treadmill and urged Peloton to recall it citing dozens of injuries and at least one death for which the CPSC alleged the Tread+ was responsible.
Foley’s response to that CPSC announcement was to issue statements on Peloton’s website “calling the CPSC advisory inaccurate and misleading, and said the treadmills are safe when users follow safety recommendations,” noted the Journal.
After the CPSC warning about the Tread+, Peloton was refusing to issue a refund for one customer who wanted to return it. Instead, Nikhil Bobb, who in 2019 bought a Tread+ for his wife, was told by a customer service rep that Peloton was not offering refunds and that he should try to sell it, noted the Journal.
Peloton is now changing its tune — offering refunds until November 6, 2022, according to AP, for customers who purchased either its “slimmed-down” $2,495 Tread machine or the “higher-end” $4,295 Tread+ model, noted the Journal.
Peloton has offered to move Tread+ machines into a room in customers’ homes that children or pets can’t access and is changing its software so the treadmill will lock after use and needs a passcode to unlock.
Peloton stock lost 15% of its value on May 5 — but does that make it cheap? Stifel’s Scott Devitt sees that as “the proverbial buying opportunity,” according to CNBC.
Here’s why I don’t think so.
Potential Loss of At Least 12% Of Peloton’s Revenue
Treadmills are not a huge part of Peloton’s business — but the recall introduces considerable uncertainty into its revenue growth.
After all, they account for about 12% of Peloton’s equipment revenue going back to 2018 according to BMO analyst Simeon Siegel. That revenue figure is just for the hardware and it excludes about 20% of Peloton’s overall sales.
It is unclear how much revenue Peloton is likely to lose as a result of this recall. How many people will return their Tread+ devices? How many people will decide to purchase a treadmill from another manufacturer? How much will demand for at-home exercise equipment in general decline now that the pandemic is ending?
Fizzling Demand for New Exercise Bikes
Peloton’s 2020 revenue rose 97% in 2020 from $915 million to $1.8 billion, according to .
Is this sustainable? Investors bought Peloton stock as consumers bought its bikes and treadmills to exercise at home while gyms were shut down. “Peloton quickly became the option of choice for those who could afford its high-end cycles and treadmills.” CNBC noted
But in 2021 Peloton stock has been reversing — down 45% so far thus year. Some the decline is due to stocks that benefited most from the work from home trend — such as Zoom and Netflix — suffering slowing growth as people contemplate going back into the world of social proximity — such as offices and gyms.
Siegel argued that the Tread+ recall accelerates its downward slide — he sees the stock falling about 46% more to his price target of $45. As he wrote, “We view this as another sign that Peloton’s voice and platform grew faster than its business, and it is still working to grow into its fame, With a still ~$30 billion market cap … Peloton’s market value looms much larger than its expected results.”
Immovable CEO
It does not help matters that Foley’s control of the company is ironclad.
What was Foley thinking in trying to shift blame to owners for injuries that the CPSC attributed to the Tread+?
After all, according to the New York Times
After the death of the child in March 2021, the Times reported that Peloton “urged users to keep Peloton products where children can’t get to them.” Did Foley expect people to move the treadmills into the attic?
This is not Peloton’s first problem with its equipment. “In October, the company recalled about 27,000 of its bikes sold between July 2013 and May 2016 after it received reports of broken pedals causing injuries,” noted the Times.
Then there is the news that Peloton user data has been hacked. According to Ars Technica, “Researchers at security consultancy Pen Test Partners on Wednesday reported that a flaw in Peloton’s online service was making data for all of its users available to anyone anywhere in the world, even when a profile was set to private.”
A Peloton spokesperson told Ars Technica, “It’s a priority for Peloton to keep our platform secure and we’re always looking to improve our approach and process for working with the external security community.”
Peloton — whose stock is down 2% in pre-market trading — is expected to report its latest results after the market closes on May 6.
