Peloton has just admitted that its big plan isn’t working as well as it had hoped. There’s not much left to like here.
Peloton Interactive‘s (PTON 1.29%) stock price has declined around 65% over the past year, and it is now down 98% from its 2021 highs. The time when the name Peloton inspired envy among consumers because of waiting lists for its connected exercise bikes is long over. And its current business model probably isn’t worth buying into.
Here’s why.
I never understood the Peloton hype
I don’t go to the gym, preferring to work out in private at home. I’ve owned more than my fair share of exercise equipment over the years, including a treadmill and a rowing machine. So I’m no stranger to exercise gear, and I’m willing to spend money on gear when I think I need it.
“Think” is the operative word there, because I no longer own a treadmill or a rowing machine. They were fun and arguably helpful for a little while, but then turned into very expensive coat racks.
Image source: Getty Images.
Which is why, during the height of the pandemic, I was leery of the Peloton story. People unable to go to a gym were lining up to buy its stationary bikes and other equipment as an at-home alternative.
Exercise equipment is loads of fun when you first buy it, but eventually the luster wears off. That’s kind of how the industry goes. And the idea that people who are used to the gym environment would give that up and only work out at home — well, that seemed a bit farfetched, too.
To be fair to Peloton, its products are very cool. The ability to take an exercise class on your connected device and compare your performance with others in the class is pretty intense. And to be able to take old classes and still compete as if the classes were currently taking place is awesome.
But that’s just software, which competitors could easily mimic closely enough to limit the appeal of buying a high-end Peloton bike. Not to shock anyone, but that’s exactly what other companies attempted to do.
For Peloton, shifting gears is harder than it looks
Which is why I found it such a head-scratcher for the company to double down on its subscription service. Selling physical gear is expensive, so I get why the company was looking for other growth options. And subscriptions are high-margin offerings.
But the company’s subscription offerings were tightly tied to its hardware. Trying to separate the two sort of pushes Peloton into the media space, since the key draw becomes the classes it offers.
Not only does Peloton have to compete with gyms in that regard, which are clearly more interactive given the face-to-face relationship, but it also has to compete with all of the other exercise content out there.
Much of that is actually free, through services like YouTube, or included with other subscriptions, like Amazon Prime. Yes, those classes aren’t live, but if you are just watching the class through a subscription anyway, what difference does it make?
PTON normalized diluted EPS (quarterly); data by YCharts. EPS = earnings per share.
This brings me to Peloton’s recent decision to stop offering free access to its subscription service. Effectively, the company believes its free option is hampering its ability to build its subscriber base. In other words, customers don’t want to pay for an exercise subscription service if there are less expensive (free) alternatives.
Defending its choice, the company explained that the subscription service is a work in progress, which probably shouldn’t be a comforting revelation for shareholders. In the end, this business shift could be a net benefit for Peloton’s subscription ambitions. But it also highlights the fact that subscriptions might not be as attractive a growth platform as the company wants investors to believe.
I just don’t buy Peloton’s business model
According to CEO Barry McCarthy, when referring to its losses, the company is still trying to “stop the bleeding.” That isn’t exactly the type of thing investors like to hear. So it makes sense that the shares have fallen so far.
But even if the bleeding stops, I don’t think there’s much long-term appeal here. Selling exercise equipment is a tough, competitive business. So is selling content subscriptions. I don’t think Peloton stands out enough on either side, at least at this point, to make the stock worth owning.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Peloton Interactive. The Motley Fool has a disclosure policy.
