Analysts were generally optimistic that Peloton’s move to bring in subscription industry veteran Barry McCarthy as CEO could help right-size its business and drive sustainable growth. Peloton, however, continues to face hurdles reigniting growth while winding down its bloated overhead structure to better match demand.

Many continued to carry “Buy” ratings on Peloton stock despite its strong run-up over the last two days. 

On Tuesday, shares shot up $7.52, or 25.3 percent, to $37.27 on the news of the CEO change and restructuring. On Monday, shares climbed $5.5, or 20.9 percent, to $29.75 on news of takeover interest from Amazon and Nike as well as potentially others, including Apple.

Shares are still well down from their all-time high of $167 reached in December 2020 as the home-fitness trend slowed over the last year.

Pelton’s news arriving Tuesday included:

  • Executive Changes: John Foley, Peloton’s CEO, since he co-founded the startup about a decade ago, will transition to executive chair. Barry McCarthy, former CFO of Spotify and Netflix, becomes CEO and president. William Lynch transitions from the president of Peloton to a non-executive director on its Board.
  • Restructuring: Peloton launched a realignment designed to achieve at least $800 million of annual run-rate cost savings through operating expense efficiencies and margin improvement in its Connected Fitness. The plan includes removing 2,800 positions or about 20 percent of its workforce. The company is also abandoning its plan to build a manufacturing plant outside Toledo, OH and instead rely on third-party manufacturers and its facilities in Taiwan.
  • Second-Quarter Results: Peloton released results for the second quarter ended December 31, in line with the preliminary update given on January 20. Total revenue was $1.14 billion, versus guidance provided with first-quarter results of $1.1 billion to $1.2 billion. Adjusted EBITDA was a loss of $266.5 million, beating guidance of a loss in the range of $350 to $325 million. The average monthly Connected Fitness churn rate remains low, at only 0.79 percent, even improving on the 0.82 seen in the fiscal first quarter. On the downside, quarter-ending Connected Fitness subscriptions were 2.77 million, down from first-quarter guidance of 2.8 to 2.85 million.
  • Outlook: Peloton lowered its guidance for the full year ended June 30. It now expects to end the year with 3 million connected fitness subscribers (down from previous guidance of 3.35 to 3.45 million). Revenue is projected within a range of $3.7 to $3.8 billion ($4.4 to $4.8 billion previously); gross margin to be about 28 percent (32 percent previously); adjusted EBITDA to range between a loss of $675 to $625 million (loss between $425 to $475 million previously).

The following is a summary of analyst views on the quarter.

• Bank of America reiterated its “Buy” rating while slightly raising its price target to $42 from $40.

Analyst Justin Post applauded the new CEO hiring. He wrote, “Mr. McCarthy has extensive experience with subscription businesses as CFO of both Netflix and Spotify, and we think well suited to right-size Peloton for a post-pandemic environment. We expect a change in company focus from rapid growth and product expansion to sustainable growth, which may include less aggressive marketing and fewer retail locations. It will probably take 2-to-3 more quarters to get expense reductions in place, and Mr. McCarthy looks well suited to help implement.”

He believed the reduced guidance from Peloton reflects the impact of the reopening economy on bike demand and “too optimistic” expectations from Peloton’s move last August to lowest the cost of the original Peloton Bike to $1,495 from $1,895. Treadmill demand has also been softer than expected.

Post maintained a “Buy” rating because he sees value in Peloton’s subscriber base while noting the monthly churn rates were encouraging. Post wrote, “We think the pressure on new adds from the reopening (also impacting Netflix) and unusual (and unsustainable) competition will diminish over time, while low churn in the quarter (0.79 percent) suggests the value proposition continues to resonate with members.”

• Deutsche Bank reiterated its “Buy” rating and raised its price target to $51 from $42.

Analyst Chris Woronka believes the CEO change and restructuring will serve as a catalyst for growth investors to “engage (or re-engage)” in Peloton, and updates on McCarthy’s revamped strategy will serve as potential catalysts in the future.

He suspects a “fairly large culture shift” under McCarthy’s leadership with additional job cuts possible and suspects analysts will be “incrementally more aggressive on margin potential” around Peloton in the future. He feels Peloton has significant potential to cut costs, believing it built its infrastructure to support 10-to-15 million subscribers, well above the 2.8 million currently. 

Woronka wrote, “While we’re aware of that old adage ‘you can’t cut your way to prosperity,’ in the case of PTON we believe there is an embedded amount of low hanging fruit here.”

He further believes marketing would benefit from a more targeted approach to drive conversion. Woronka stated, “While execution is always key, we continue to see PTON’s brand, along with its uncommonly strong customer loyalty and retention as being the single most important asset that Mr. McCarthy can leverage, particularly in the context of operating in an industry (fitness) that we still very much see as a secular winner.”

• Oppenheimer raised its price target to $45 from $40 while maintaining its “Outperform” rating.

Jason Helfstein said his team believes the current valuation remains depressed despite the two-day run-up. He wrote in a note, “We applaud CEO & President for making the difficult decision to step back and bring in an outside perspective to help right-size the company and invest in responsible growth. Ultimately, we think PTON is being positioned to sell, as we don’t see new CEO Barry McCarthy (age 69 and member of five other boards) as a day-to-day operator.”

Helfstein sees the cost-reduction efforts will help support Connected Fitness gross margins in the June quarter, with the full benefit arriving in late 2023. Helfstein also noted that Peloton continues to explore new growth opportunities, including the planned April launch of the Peloton Guide, a $495 TV-connected camera that allows users to do strength training workouts on their TVs. 

In October, Peloton launched a Guest Pass referral program and disclosed higher conversion for Guest Pass subscriptions versus those acquired by other means.

Helfstein wrote on its investment thesis on Peloton, “We believe Peloton is redefining fitness, based on its convenience and relative value vs. other premium offerings. As the company continues to quickly grow its subscriber base, we forecast subscription contribution margin will exceed 70 percent, with churn remaining minimal. We believe the secular trend of connected fitness wearables and health and wellness industry spending support Peloton further penetrating into its TAM (currently 5 percent share).”

• Credit Suisse raised its price target to $36 from $30 while maintaining its “Neutral” rating.

Kaumil Gajrawala stated in a note, “Management changes, restructuring plans, and a cut to guidance begin to change the narrative. However, Peloton now has the unenviable task of trimming costs and restoring margins while demand is slowing. We think the roadmap established and intentions to execute look reasonable, though the timeline to get there is still fluid.”

On the positive side, Gajrawala views the management change as necessary to execute this turnaround. He said of McCarthy, “Our diligence suggests he is likely more deliberate and less reactive, with a focus on process and tight financial and operational management.”

However, he said higher-cost inventory might take 12-to-18 months to work through. Peloton, Gajrawala added, also still needs to figure out what run-rate demand and acquisition costs look like while noting that this may be a challenge with management’s focus shifting toward profitability and society reopening from the pandemic.

Gajrawala further sees a near-term acquisition as less likely given the job cuts. He added, “However, as Peloton shifts to a more asset-light structure, the business may become more attractive to strategic acquirers in the future than it is today.”

• Stifel maintained its “Buy” rating and lifted its price target to $45 from $40.

Scott Devitt said the slower demand environment and ongoing operational challenges are causing guidance to come down in the near term. However, Stifel raised its intermediate- and long-term profitability estimates to reflect ongoing cost structure changes and more modest capital investment.

Devitt’s investment thesis on the stock reads: “Peloton is taking share across the fitness equipment category, in our view, and remains well positioned to continue doing so and expand the market as it drives innovation in the industry and business model. While the company faces several quarters of challenging compares and reopening economies, we believe current valuation represents an attractive risk/reward setup and look to new product introductions and market expansion as drivers of long-term growth.”

• Loop Capital Markets kept its “Buy” rating on Peloton while lowering its price target from $90 to $55.

Analyst Daniel Adam noted that Peloton’s shares initially traded down more than 10 percent in pre-opening trading Tuesday only to end up climbing 25 percent on the day. Adam wrote, “To this end, there are generally two schools of thought regarding today’s “wild ride”. The first is that, following the sweeping changes that PTON announced this morning (e.g., extensive cost cuts, leadership changes, the company’s shift to a “capex-light” model) investors’ initial knee jerk reaction was that a sale – whether to AMZN, NKE, AAPL, private equity, or any number of other parties recently rumored to be interested – might not be imminent. The second is that, not only should these changes accelerate PTON’s path to profitability, but also could mean that recent activist pressures are having an impact. We subscribe to this second school of thinking. While we are lowering our PT to $55 (from $90), with [about] 48% upside potential to our target, we remain Buy.”

• BMO Capital Markets kept its “Underperform” rating with a $28 price target.

Analyst Simeon Siegel wrote, “This was not a good quarter. Non-Precor sales ~flat, GM -1,500bps, ~$566mn FCF burn, monthly engagement slipped to ~7-8 Workouts/Member, another Subscriber/revenue guide down, coupled with meaningful cost cuts, (we estimate representing the entire incremental labor spend added since COVID), suggesting a clear pivot from growth to restructuring. However, setting the underperformance aside & mirroring past 1.5 year’s communications, management reverted to hopes of growth, suggesting a reduced workforce/spending would have no bearing on revenue opportunity. Fearing shares are yet again detached from the numbers, our concerns are growing; Underperform.

• Baird maintained its “Outperform” rating and raised its price target to $46 from $40.

Jonathan Komp stated in a note, “We are encouraged by the willingness of the company – especially John Foley/the board – to initiate the necessary actions to enhance current leadership, to right-size relative to post-COVID demand, and to transition to a sustained, profitable growth profile. While the plans are unlikely to satisfy all parties in the face of current demand softness and operating losses (shareholder Blackwells Capital calling for further change, immediate sale process), the moves combined with the expertise of incoming CEO Barry McCarthy dramatically change the outlook for PTON as a stand-alone business, in our opinion.”

Komp also applauded Peloton’s focus on preserving the current breadth/depth of content to capitalize on the Connected Fitness opportunity. The analyst wrote, “While the onus will remain on PTON to prove consistent execution, a favorable long-term industry backdrop combined with greater visibility to PTON’s growth model could attract more investor interest.”

• UBS kept its “Sell” rating with a price target of $30.

On the positive side, Arpiné Kocharyan noted that Barry McCarthy’s experience in cost optimization at Spotify and Netflix should help guide Peloton as it seeks cost efficiencies. He wrote in a note, “While we find his experience as an operator less obvious, his solid background in overseeing financial organizations of successful subscription businesses and capital allocation/balance sheet and efficiency/cost management appear to make him a good fit.”

However, he still wonders whether the restructuring moves will be enough to bring Peloton’s hardware business to optimal profitability to fund new subscriber acquisition costs. Kocharyan stated, “Our take on restructurings in general is that cost cutting is perhaps the easier part of the equation, and what is typically harder to figure out is demand and growth longer term.”

Photo courtesy Peloton