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As Peloton’s Turnaround Falters, Is an Apple Buyout the Last Resort?

Barchart - Fri Feb 9, 10:08AM CST

It is now exactly two years since Barry McCarthy, the former CFO of Spotify (SPOT) and Netflix (NFLX), joined Peloton Interactive (PTON) as the CEO, replacing co-founder John Foley. The move came after a 76% fall in PTON during the year prior, even as U.S. stock markets delivered strong double-digit returns in 2021.

McCarthy embarked on a turnaround plan, and was quite candid in reminding shareholders that turnarounds are neither easy, nor are they an overnight process. In the meantime, PTON stock has continued to fall to new all-time lows - including earlier this month, after the company released its fiscal Q2 earnings.

As Peloton’s turnaround continues to take much longer than what markets initially hoped for, is a buyout by a tech company like Apple (AAPL) the last resort for the company? We'll discuss in this article. 

Why Is Peloton’s Turnaround Taking So Long?

To start, let's look at the most recent update on Peloton’s turnaround that the company provided earlier this month. McCarthy said that some of the initiatives have performed well. These include:

  • Peloton's bike rental program, whose success has prompted the company to consider a similar business model in other markets, like corporate wellness
  • The partnership with Amazon (AMZN) and Dick’s Sporting Goods (DKS) appears to be a success, delivering 74% YoY unit growth in the channel in the most recent quarter
  • The improved performance of its subsidiary Precor, which generated $70 million of Q2 revenue

On the other hand, Peloton admitted that some initiatives did not go as planned - including the launch of a co-branded bike with the University of Michigan, whose tepid sales have led to the shelving of that experiment. McCarthy also cited member support as an area where the company failed to meet customer expectations, but said that Peloton has now revamped that team.

During the fiscal Q2 earnings call, McCarthy also acknowledged that Peloton hasn’t delivered much on product innovation, but promised “significant product innovation” over the next couple of years.

Peloton Extends the Timeline for Growth and Free Cash Flow Generation

McCarthy had two main goals for Peloton - first, to return the company to revenue growth; and second, to transform it from a cash-guzzling business to one that can generate free cash flows.

In his fiscal Q2 shareholder letter, McCarthy said that instead of becoming free cash flow positive in the full fiscal year 2024, as the company previously forecasted, Peloton would now achieve that feat only for fiscal Q4. Similarly, management now expects revenues to rise YoY only in fiscal Q4, which is also later than what the company predicted last year.

PTON Stock Forecast

Peloton has been out of favor with analysts for quite some time now, and the company’s disappointing 2024 guidance didn't cut any ice with Wall Street, either. PTON stock has a consensus rating of “Hold” from analysts, although the mean target price of $7.55 is almost 67% higher than yesterday’s closing price.

Is Apple Interested in Buying Peloton?

There have been intermittent reports that Apple might be interested in buying Peloton. The tech giant is also eyeing the healthcare industry, and as far back as 2019, its CEO Tim Cook said that improving people’s health would be "Apple’s greatest contribution to mankind.”

Last month, the idea of Apple buying Peloton received some credence when Deepwater Asset Management co-founder Gene Munster said that the “stars are starting to line up” for a potential acquisition. To substantiate his point, Munster cited Cook’s previous remarks about healthcare, Apple’s focus on growing its subscription revenues, and how Peloton fits into Apple's overall subscription strategy, with its around 3 million connected fitness subscribers. He also pointed out that the deal would make financial sense, as Peloton is trading at only about twice its subscription revenues.

In the past, Amazon and Nike (NKE) have also been rumored to be interested in buying Peloton. Amazon, incidentally, was on a buying spree, and in 2022 announced the acquisition of One Medical and iRobot (IRBT). While the former deal has since been completed, the iRobot acquisition failed to clear regulatory hurdles in Europe, and was eventually shelved.

While the opinion on whether Apple should buy Peloton is skewed on both extremes - with some finding the proposition attractive, and others ridiculing the idea of Apple rescuing a troubled company like Peloton - I believe the fitness company should eventually find a suitor, especially as tech giants ranging from Microsoft (MSFT) to Alphabet (GOOG) sense a massive opportunity in healthcare.

On the date of publication, Mohit Oberoi had a position in: PTON , GOOG , MSFT , AMZN , AAPL , NKE . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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