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Actors are pictured from 'The Gift That Gives Back' exercise bike commercial by Peloton, obtained Dec. 4, 2019.PELOTON/Reuters

David Goldreich is a professor of finance at the University of Toronto’s Rotman School of Management

Social media exploded last week over a television commercial for Peloton exercise bicycles. Commentators saw a husband’s Christmas gift of exercise equipment to his wife as a creepy reflection of an oppressive patriarchy. In my view, the ad is neither more nor less inane than many other advertisements.

I was barely aware of Peloton Interactive Inc. before, probably because I am not in their target market of buyers of high-end WiFi-enabled exercise equipment. However, many people do know the brand, as some 1.4 million sweaty people subscribe to their fitness service, which is the heart of their business model.

The most wildly off-base narrative, picked up in headlines around the world, was that Peloton’s market value dropped by US$1.5-billion because of the controversy. This calculation was based on the fall in Peloton stock price (Nasdaq: PTON) by some 15 per cent from US$36.84 early in the week to US$31.31 three days later. It is often informative to look at stock prices to gain insights on news items that affect a company. But in this case, the interpretation of the decline in share price was wrong.

What actually happened in the market? Peloton went public in late September, selling its shares for US$29 in an initial public offering. In the weeks after an IPO, share prices are notoriously volatile as the market tries to reach consensus on fair value. Since its IPO, Peloton’s share price has fluctuated about 4 per cent a day – volatile, but not out of line for a young fast-growing company such as Peloton that is years away from making a profit. Indeed, in the two days before the midweek decline, Peloton’s share price went up by 14 per cent. Moreover, in the two trading days after the decline, the share price rebounded by 11 per cent.

Google Trends is a helpful service that reports the popularity of Google searches over time. It has been used in a number of academic studies over the past decade to show how increased attention relates to a company’s stock price. Google Trends shows that searches for the word “Peloton” rose above its normal level a few days before the share place decline, approximately coinciding with the release of the Christmas commercial. Search traffic rose significantly more during the market decline while social media were in an uproar. Google searches for “Peloton” continued even higher as newspapers reported on the controversy and the share price rebounded. This pattern suggests that public interest in Peloton coincided with volatility, but absolutely does not suggest that public disapproval of the advertisement caused a share decline.

This leaves the question: Why did the price decline last week? Most likely, it was a response to the announcement of Peloton’s plan to drop its digital-only subscription price from US$19.49 to US$12.99 a month. As the company continues to grow, it constantly updates and modifies its offerings. Peloton’s initial product requires consumers to pay a hefty upfront price for their indoor cycling machine complete with WiFi and a large video display screen. For their monthly subscription fee, users can join real-time spin classes with participants around the world. Later, Peloton added a digital subscription plan through an app, without a purchase of the cycling machine, offering live and recorded studio fitness classes including yoga, running and strength conditioning. The reduction in price for the digital-only plan may be a signal of management’s doubts regarding future growth and the number of overall subscribers they can retain. Uncertainty over future growth could definitely impact the stock price.

So what is the likely effect of the controversy over the television commercial? Is it more likely that customers will avoid Peloton because of its perceived insensitivity, or is it more likely that new potential customers became aware of their products and services? So far, the advertisement has close to eight million views on YouTube. I am willing to bet that the aphorism “there’s no such thing as bad publicity” applies here.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 24/05/24 4:00pm EDT.

SymbolName% changeLast
PTON-Q
Peloton Interactive Inc
-2.48%3.15

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