How Peloton Became a Victim of Its Own Success
Editor's note: This pandemic-era darling went from boom to bust...
When COVID-19 lockdowns prevented people from going to their local gyms, many folks turned to Peloton Interactive – an e-fitness company best known for its Internet-connected bikes and treadmills that offer online instructor-led workout classes.
As a result, Peloton's stock exploded higher. But it wasn't long before investors saw Peloton for what it really was... an unprofitable company. According to Income Intelligence editor Dr. David "Doc" Eifrig, Peloton's rapid success is what ultimately led to the company's downfall...
In today's Masters Series, originally from the May issue of Income Intelligence, Doc details Peloton's rise to success during the pandemic... reveals what caused it to plummet... and explains why it's unlikely to return to those levels...
How Peloton Became a Victim of Its Own Success
Sometimes, success can destroy you.
To see what I mean, consider the rise and fall of Peloton...
Peloton Interactive (PTON) had a pretty good thing going. The company fostered an almost fanatical devotion in its customers – first, they'd spend $2,000 on its exercise bike, then they'd pay more for a subscription to interactive spin classes.
The bike and classes may be expensive, but they're great. At least two members of our research team are fans. I personally ride two times a week and love Peloton's mini-bootcamp classes.
And business was booming... until the pandemic happened. Then things went from booming to bonkers.
Suddenly, Peloton was selling more than a billion dollars' worth of exercise equipment in a single quarter. Everyone was stuck at home, and a Peloton bike became one of the hot things to own.
But Peloton wasn't ready. So the mistakes started happening.
The company couldn't make its bikes fast enough. Shipments lagged. Customers complained that quality was falling and that repairs took months. And a new treadmill had a safety defect that killed a small child, forcing a costly recall to repair the units and taking the product off the market for several months.
At the same time, management decided to spend hundreds of millions of dollars to ramp up production and logistics. When the pandemic lockdowns eased, the slowdown in sales became an absolute catastrophe. Peloton had thousands of unsold bikes, a weak balance sheet, and an investor base with no confidence in management.
The company ousted its founding CEO, started laying off employees, discounted its bikes, and began looking for someone to buy it out.
It's a far fall for a company that had convinced investors that it would go on to become the biggest name in global fitness...
At one point, Peloton was valued at $48 billion based on about $3 billion in sales.
Stodgy income investors like us love to point out silly valuations like 16 times sales. We trot them out like little trinkets we've collected at the flea market to show the absurdity that markets can reach. But let's really dig into what that valuation implies...
Stocks derive their valuation from their future cash flows – not the present. So what kind of future was Peloton's $48 billion valuation implying?
First, we have to think of what Peloton would look like as a mature business, when it had stopped growing so fast and had reached a steady state of maybe 6% growth per year. A business like that would often be valued around 15 times earnings.
Peloton is not and was never profitable... but maybe someday it could be. Let's be generous and say it could earn a 30% profit margin.
Under these assumptions, for Peloton to grow into its $48 billion peak valuation, it would have to generate $16 billion in annual sales.
There simply aren't enough people willing and able to buy that many bikes and subscriptions... no matter how hot Peloton's brand is. Even amid the pandemic lockdowns, Peloton's sales only reached $4 billion in its 2021 fiscal year – a quarter of that volume.
Investors ignored all that. And it's because Peloton had a narrative. The story was not that Peloton would turn profitable and grow into its $48 billion valuation by selling stationary bicycles. Rather, Peloton would change the way we work out and capture the entire fitness market.
After all, the company didn't just sell bikes – it sold subscriptions to live exercise classes. It was going to expand into other equipment, apparel, and in-person locations. It would create an entire new category of fitness industry.
But it turns out Peloton couldn't even figure out its own inventory levels.
Now here's the thing that Peloton shareholders need to realize... The old narrative is never coming back.
Right now, Peloton is valued at around $3 billion. In a year's time, it could be worth $5 billion... or perhaps $1 billion. We don't have a particular outlook and we're not making a specific call here.
One thing is clear: It will never be worth $48 billion again.
First, there's just the math of it... Peloton needs a rise of more than 1,000% to get back to a $48 billion market cap. That's not likely.
But, more important, it's difficult to build a mystique around a company that convinces the market it can change the world. And it's a fragile existence. As you can see, a small tear in the story brings the whole thing down.
And once you lose it... you can't get it back. No amount of success in Peloton's turnaround will bring back the glow of its prior glory. Selling more bikes and subscriptions, adding rowing machines to the product suite, or selling treadmills that don't injure people... these factors can help. They can lead to a rise in the stock. But none will turn Peloton back into the financial darling it once was.
Peloton is an extreme example. But it isn't alone. As I'll discuss tomorrow, the same pattern applies to a whole host of once-beloved technology stocks that have taken losses in the 50% to 80% range.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Editor's note: If you want to avoid massive losses like this, you need to be well-informed about a company before you invest in it...
That's why the best investors do their due diligence, avoid letting emotions drive their decisions, and stick to their investment plan. But most folks simply don't have the time to build that discipline.
So to ease that burden, next week, Doc will share the biggest financial opportunity of his career. It's one of the surest things he's ever seen in the financial world... and it's already happening now. Get the details here.