This article first appeared in The Edge Malaysia Weekly on February 21, 2022 - February 27, 2022

IN August 2019, six months before the start of the Covid-19 epidemic, I wrote in this column about the IPO of Peloton, a connected fitness upstart that made expensive stationary bikes and a user-friendly fitness app. “Peloton is so much more than a bike,” its co-founder and CEO John Foley noted in its IPO filing earlier that year. “On the most basic level, Peloton sells happiness.” A few weeks later, Peloton listed at US$29 a share. The big question at the time was whether the bike was more overvalued than the stock. You might recall I wrote that I was thinking of buying the bike myself because I liked the instructors on its app but would not touch the overpriced stock. In my mind, I had rationalised that if I had the bike staring at my face every day, I would exercise more rather than let it become an expensive coat hanger.

I ended up buying neither the bike nor the stock. At the start of the pandemic, the gym in my condo was shuttered temporarily, suspending my daily 45-minute run on the unconnected treadmill. I turned to an hour of running in a park near my home. Truth be told, there were moments of regret. At the height of the pandemic, I again looked at buying Peloton — the bike, not the stock. Indeed, I might have ordered the bike if it hadn’t been for the long wait time for the cheapest Peloton model — up to 12 weeks.  Pay up front and Peloton would try its best to deliver a bike in 12 weeks. Needless to say, I got back to running in the park again.

As it turned out, shunning the bike, and the stock, was a great decision. Shares of the company had a wild ride up and bumpy ride down until it was forced to slam the brakes last month for a reset of sorts. Peloton stock peaked in January 2021 at US$167 per share. By the end of last month, the shares had fallen to US$22.81, down 87% from their peak and over 21% from their IPO price. They have since bounced back to around US$32 on management changes, restructuring and rumours of an ultimate sale to a strategic buyer. And, oh, Peloton slashed the price of its cheapest bike from US$1,995 to US$1,495. The price of its original bike was cut from US$2,245 to US$1,895. Had I bought the bike a year ago, I would have paid up to 30% more. These days, of course, there are plenty of “sparingly used” Peloton bikes that are being peddled on the internet for a fraction of what the original bikes sold for in 2020.

In some ways, Peloton’s woes are not very different from those of some of the upstart “pandemic beneficiaries” such as video­telephony and online chat services operator Zoom Video Communications Inc, electronic signature firm DocuSign Inc and telemedicine pioneer Teladoc Health Inc. These companies became household names in the first 18 months of Covid-19 restrictions but have had a challenging time living up to ultra-high expectations as economies open up and life returns to some form of normalcy through gyms, hybrid work environments and actual visits to doctors’ clinics. Like Peloton, those pandemic icons saw their own stock soar as lockdowns began, only to fall hard as vaccines appeared. Zoom shares are down 72%, Teladoc 75% and DocuSign 60% from their pandemic peaks.

Yet Peloton’s problems are unique. Instead of looking at the pandemic as a once-in-a-lifetime opportunity to put itself on a stronger footing, Peloton’s management treated the lockdown and restrictions, which boosted demand for its bikes, treadmills and fitness app, as the “new normal”. “I see a couple of hundred million people on the Peloton platform in 15 years,” CEO Foley was reported as saying at the height of the pandemic. That is a compound annual growth rate of over 30% for the next 15 years.

As the world opened up once again, the at-home fitness gear firm was caught flat-footed. Gyms across North America have returned to the levels they saw in the weeks before Covid-19-related shutdowns began in March 2020. Gym visits in the US are now running above late-2019 levels, according to Placer.ai, a foot-traffic analysis company. Planet Fitness memberships in the US recently surpassed the pre-pandemic peak of 15.5 million.

The irony is that the pandemic has unleashed a worldwide boom in wellness and fitness. Global wellness spending was estimated at US$4.2 trillion in 2020, while spending on fitness tops US$600 billion every year. There were over 180 million gym memberships globally in 2018, including about 62 million in the US. Last year, more than 74 million people went to a gym at least once in the US alone.

Peloton is one of a handful of connected fitness firms that have emerged to take advantage of the wellness trend. If you buy a Peloton, you join a touchscreen-based, fitness-focused, affluent community of three million bike and treadmill users who are connected to trainers through live or recorded videos. The bikes cost between US$1,495 and US$3,000, and for US$39.99 plus tax, you can get an all-access membership to an array of video content with the instructors. What Peloton has is an incredibly engaged and committed user base. The firm’s users aren’t just passionate about the stationary bike but also its “star” instructors like Cody Rigsby, Christine D’Ercole and Camila Ramón, who regularly appear on the bike’s screen.

Peloton is not the only connected fitness player in the field. There are tons of imitators. There is Hydrow, which sells connected fitness rowing machines for US$2,199. There is the US$1,345 smart Mirror, which streams virtual classes for cardio exercises on the surface of the device as you work out. Mirror is made by yoga gear giant Lululemon. You have to fork out between US$2,995 and US$3,490 to buy smart home gym machines by Tonal for weight training. Boxing enthusiasts can buy FightCamp equipment for US$1,299 plus US$39.90 for membership access to content. There are also cheaper versions of stationary bikes from companies like Echelon and NordicTrack. Across North America, specialist gyms like Equinox now offer their own connected treadmills, bikes and Peloton-like content. The competition for Peloton is only getting started.

Unfortunately, the transition from a pandemic economy to a post-pandemic era is also proving to be fairly challenging for Peloton, which lost US$439 million just in the last quarter. Customers are shunning its stationary bikes, treadmills, weights and apparel. Its user numbers in the October to December quarter soared 66% while revenue only grew 6%. Here’s why: Peloton was discounting heavily. At a time when most hardware makers were having trouble sourcing components from their supply chain to meet production targets, Peloton’s inventory of fitness equipment grew to US$1.3 billion from zero with long waiting lists just 18 months ago. Not only did Peloton make way too many bikes, it had way too much capacity. It bought a fitness equipment maker Precor  for US$431 million in 2020. It spent another US$400 million building a bigger plant in Ohio. Now, it is abandoning the half-built plant and would have no use for the other, older plant for a while because it has enough inventory to last six months.

Two weeks ago, Peloton announced that it would lay off 2,800 staffers and that founder John Foley would step down as CEO. He is being replaced by Barry McCarthy, 69, who served as chief financial officer of music streaming firm Spotify and video streaming giant Netflix. McCarthy’s background is in software and consumer content companies that rely on subscription-as-a-service, or the SaaS business model.

The restructuring and management changes come in the aftermath of a campaign by New York-based activist investor Blackwells Capital, which took a 5% stake in Peloton and called for Foley’s ouster, the clearing out of the entire board and an investigation into possible misconduct by senior management. Blackwells accused Peloton’s management and board of enriching themselves by selling more than US$700 million worth of stock since its IPO, just as market value began to plunge. The activist firm blamed Peloton’s top management and board for “poor decision making, lack of financial discipline, lack of credibility and misalignment of interests”. Blackwells wants Peloton to immediately explore a sale to the highest bidder because the stock will continue to languish as a standalone.

Since Blackwells emerged as an activist pushing for change at Peloton, its stock has rebounded 36%. Billionaire investor George Soros recently disclosed that he bought a new stake worth US$13.3 million in Peloton and other hedge funds have reportedly accumulated stakes in anticipation of a takeover bid. In its presentation, Blackwells put a fair value for Peloton at US$65 a share, arguing that a strategic investor could pay US$75 a share. Even at the high end of the range, the acquisition of Peloton would likely be accretive to most strategic buyers with very modest cross-selling and penetration assumptions, it noted. Amazon, for example, would need just 2.3% penetration of its Prime subscribers to make the acquisition accretive.

Several strategic investors are reportedly interested in Peloton, including e-commerce behemoth Amazon.com and athleisure firm Nike. Amazon could be a great fit for Peloton because of its Prime subscription offering. The acquisition will allow it to sell bikes on its e-commerce platform and deliver them to the homes of 172 million Prime customers. Selling most of the bikes online rather than through expensive physical stores would drastically cut costs, as would access to Amazon’s excellent supply chain. Amazon could also include Peloton and connected fitness subscriptions in a premium Prime+ subscription bundle.

Not everyone is betting that a takeover would materialise or a buyer would be willing to pay what the majority of Peloton’s shareholders want — a high price. Prominent activist investor and short-seller Andrew Left of Citron Research, who has long been sceptical of the durability of the stationary bike maker’s business model, now believes it may be time for Peloton to get down to business as investors are excited about new CEO McCarthy, who is well suited to help Peloton transition into a true wellness company. Left notes that Peloton last year secretly trademarked food and meal offerings that fit its goal of wellness. Food, notes Left, is the largest consumer category in the US. “Not only does McCarthy understand the value of the subscription business, but he also understands the food industry as he is on the board of Instacart, which recently partnered with meal kit delivery company Sunbasket,” he says.

Offering meal kits and integrating food in its programming to its busy and engaged subscribers is the natural progression for Peloton, Left noted in a recent report on Peloton. He believes Peloton would be better off as a predator rather than a prey, buying meal kit firm Blue Apron, whose market capitalisation has fallen to just US$210 million as its once high-flying stock has plunged 96% since its 2017 listing. For Peloton, which is even now valued at over US$10.6 billion, the acquisition would hardly make a dent even if it paid a premium over the current price. A smart acquisition, says Left, would help transform Peloton into the wellness company that was promised to shareholders at the time of its IPO three years ago. Beleaguered Peloton is seen as a “fixable” company. Whether small bolt-on acquisitions will be enough to keep it as standalone firm remains to be seen.

Assif Shameen is a technology writer based in North America

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