Peloton founders quit: Is a $3 billion fitness app a share to buy?

Peloton founders quit: Is a $3 billion fitness app a share to buy?

The future of the connected fitness equipment maker Interactive Peloton (PTON 1.85%) It looks very suspect — not because its CEO and co-founder, John Foley, just quit the company, but because it’s really just a small, niche company that doesn’t deserve to be valued in the market.

Expensive exercise equipment has a pretty narrow channel to attract consumers, which is why Peloton tends to be a subscription business, although that ultimately makes Peloton more than just a glorified workout app. Investors are unlikely to want to pay a premium for such small-bet operations, although with Foley out, he could also put Peloton for sale.

Image source: Peloton Interactive.

Cleaning Campaign

The resignation of Foley and co-founder Hisao Koshi represents a final sweep of the old guard who ran the fitness equipment company.

Earlier this year, when Foley resigned as CEO to take over as executive chairman, and Peloton chairman William Lynch also left the company, there was speculation that the moves could lead to the creation of a fitness company for sale. But since Foley overwhelmingly owns Peloton’s Class B shares with a 20-to-1 vote on Class A shares, he suggested he wasn’t about to sell his company.

Besides, the former Netflix CEO Barry McCarthy came out of retirement to take over as CEO and said he didn’t join a company simply to sell it. He wanted to turn it around.

But with Foley and the rest of the Peloton founders out now completely, it’s entirely possible that Foley will sell his stock or at least be more accepting of selling the company. McCarthy said Goldman Sachs Conference on the day the resignations were announced that his only goal was to get Peloton back on his feet and then back into retirement again.

While the Peloton is clearly not yet fixed, it may not be long before McCarthy declares “mission accomplished” and moves on. He has already said he has raised prices on exercise equipment because Peloton doesn’t use life support devices anymore, and expects the company to generate sustainable positive free cash flow by June 2023. That may mean there is no time before Peloton is seen as a ship shape Only after less than a year. for sale.

Exercise lessons are the future

There are hints that this is the plan. McCarthy pushes Peloton digital offerings even more aggressively. While he was opening a storefront in Amazon For equipment and accessories, one of the key initiatives to get Peloton back on track is to expand the availability of its online classes.

The classes were originally available to purchasers of Peloton training equipment, and were later offered as a standalone subscription, and now McCarthy sees an opportunity in offering them for use on competitors’ equipment. It is an extension born out of necessity.

Peloton has about 3 million connected fitness subscribers, but their growth has stalled, and those who keep subscribing are moving less towards them. The total number of workouts done by members is down 20% compared to last year, and the average monthly number of workouts per connected fitness subscription is down 21%.

The average monthly network-connected average fitness rate has also nearly doubled consecutively and year-over-year, a sign that more Peloton owners are no longer using their equipment and canceling the subscription. Peloton needs a larger world of customers to take advantage of especially if it looks more attractive to a potential buyer like Amazon or appleas was originally expected.

diminished look

During the boom of the pandemic, the equipment maker believed that vertical integration of equipment manufacturing, selling and distribution was essential to growing the business. The post-pandemic shutdown has now found Peloton rapidly exiting the hardware channels, in favor of higher-margin, lower-cost training classes.

That may stop Peloton’s financial bleeding, but it also makes it an app-focused business rather than a fitness equipment company. This is a good business to run (or sell), but it’s not a model that investors are willing to pay such a high premium for its shares.

John Mackie, CEO of Whole Foods Market, an Amazon company, is a member of The Motley Fool’s Board of Directors. Rich Dupre He has no position in any of the mentioned shares. Motley Fool has positions at Amazon, Apple, Goldman Sachs, Netflix and Peloton Interactive. Motley Fool recommends the following options: long calls in March 2023 worth $120 on Apple and short calls in March 2023 worth $130 on Apple. Motley Fool has a disclosure policy.

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