If you didn't think things could any worse for Peloton Interactive(NASDAQ: PTON), they just did. It provided a bombshell update on Thursday for investors, with the prime detail that CEO Barry McCarthy, who's been at the helm for just over two years, was leaving the company.
Just around the time McCarthy took over, there were rumors about it being a possible acquisition target from Amazon and others. With McCarthy out, is that the next step? Let's see what's happening at Peloton.
Peloton can't find its footing
Peloton gave three updates to investors on Thursday. The first was about the "leadership change," the second was about another round of layoffs, with 400 jobs affected, and the third was the regular quarterly earnings release.
There were many positive elements in the earnings release, for the 2024 fiscal third quarter (ended March 31). But other metrics are still moving in the wrong direction.
Subscription revenue increased 3% over last year, and since it's the larger business, it offset the 12% decrease in hardware revenue to some degree for a total decrease of 3%. McCarthy came with a background at Netflix, and his experience in subscription services was a draw. This is the right direction for Peloton, and that business is improving.
Subscriptions is a high-margin business, and subscription gross profit and margin improved in the quarter, 4% and 0.8 percentage points respectively. That was enough to offset the decreases in hardware gross profit and margin for a total increase of 3% and 2.9 percentage points.
Management noted that it's been doing the hard work of rooting out expenses and becoming more profitable from within its current revenue levels, and it pointed out that it sees continuing opportunities to generate positive free cash flow within these levels. Net loss improved 14% from last year to $167.3 million, and Peloton generated $8.6 million in free cash flow. It's aiming for $200 million in annualized expense reduction through next year to support consistent positive free cash flow.
It's not surprising that investors are confused
I want to explore an interesting phenomenon that happened on the day of the triple-whammy announcement. Peloton stock soared, plunged, and rebalanced, ending the day down 3%. Clearly, investors were confused. What to make of all of this? Perhaps counterintuitively, the market often cheers big changes, because they can herald in a new, improved era. But, more intuitively, they can also signal distress, even desperation.
On the earnings call, there was a lot of talk about marketing, new ventures, reaching new audiences, and trying to capture customers efficiently, because right now it costs too much money. Now I'm not a marketing expert, but all of this sounds like a lot of noise that sidesteps the main issue here: does Peloton have a viable product? If Peloton has a great product, it should mostly speak for itself. Some of the older readers might remember Honda's iconic marketing campaign about the car that sells itself. It was so resonant because it was true, and it's true for every excellent product. (With a little help from ads.)
On the call, management reminded listeners that Peloton has a $1.7 billion annualized run rate. Believers are loyal, and it has a fairly consistent 1.2% churn on connected fitness subscribers.
Maybe Peloton needs to refocus on improving its product to capture more customers? Many companies feel pressure to report financial improvement, because that's what shareholders want to see. And that's important because if it loses the confidence of investors, both individual and institutional, it could face severe consequences and lead to a forced sale or bankruptcy. However, the repeated attempts to try new things don't inspire confidence, at least to me.
Peloton certainly has the potential to make a real comeback. It has high revenue, a loyal customer base, and consumer trends moving toward its digital, connected operating model. It might be just a bit ahead of its time. But I would remain wary in the current state of flux.
Should you invest $1,000 in Peloton Interactive right now?
Before you buy stock in Peloton Interactive, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Peloton Interactive wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $544,015!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of May 6, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Netflix, and Peloton Interactive. The Motley Fool has a disclosure policy.
