Peloton Turnaround Gains Some Steam Despite Eighth Straight Quarterly Loss

Key Takeaways

• Peloton has beaten Q4 revenue forecasts, but still notched their 8th consecutive quarterly loss
• Despite the loss, the stock was up 7% after the announcement as subscription revenue jumped 22%
• This is in line with the shift of focus spearheaded by CEO Barry McCarthy, who’s utilising his experience as CFO at Netflix and Spotify to pivot Peloton to focus on content over hardward

It was the eighth straight quarter of negative profit for Peloton, but the mood from the company and from Wall Street was optimistic. The stock price even jumped 7% on the announcement of the Q4 net loss of $335.4 million.

Why, you ask?

How can a company lose well over a quarter of a billion dollars in just three months, and yet the stock goes up? Well, as with many market moves, it comes down to expectations. Yes, Peloton racked up some continued losses last quarter, but the numbers were lower than a year ago.

The reason this is important is because Peloton are in the middle of a major turnaround, with CEO Barry McCarthy pivoting the company to focus more on their content platform, as opposed to their hardware.

The narrowing of their losses is an encouraging sign that things may be starting to (slowly) turn around.

For investors who want to be at the cutting edge of tech, picking when a company like Peloton might be on the way up is a very tough nut to crack. Luckily, you can enlist the help of AI, and invest in companies like Peloton in our Emerging Tech Kit.

So what are Peloton’s results and what are McCarthy’s plans to turn the company around?

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Peloton’s Q4 financial results

Q4 of 2022 ended with Peloton notching a loss of $335.4 million, against losses of $439.4 million from the same time in 2021. The headline revenue figure came in at $792.7 million, which was significantly higher than the $710 million which had been expected according to Refinitiv.

Revenue overall was also down from Q4 of 2021 when it hit $1.13 billion, caused mainly by a 52% drop in the connected fitness product sales. This category is what Peloton initially became known for, and includes their physical hardware including the Bike, Tread and recently launched Peloton Row.

This is particularly noticeable given the time of year. Peloton hardware isn’t cheap, and much like their widely mocked commercial suggested, the holidays is, in fact, a popular time for fitness equipment purchases.

As Barry McCarthy stated in a recent interview, “This is the time of year when, if we’re going to sell a lot of hardware, we have, so you would expect there to be lots of hardware related revenue, and you would expect that maybe that revenue would exceed subscription. It didn’t.”

On the flip side, subscription revenue was up 22%.

While this might not seem like great news, it’s this trajectory which has caused Wall Street to show signs of optimism towards the company. In the same interview, McCarthy said that “It may be a turning point.”

But why?

Pelotons road to (potential) profitability

And it’s that man, Barry McCarthy, who’s been brought in specifically to find that turning point. As a hugely hyped, venture capital backed startup, Peloton’s initial USP was around their proprietary hardware, in conjunction with their high energy, community based content platform.

The company grew fast and managed to achieve unicorn status prior to their IPO. With their stock price remaining relatively flat in the first couple of years in the public markets, the company took off as the pandemic hit.

With the massive spike in at-home fitness, they were very well placed to provide households with workouts with a community aspect, without the need to leave the house. This saw the stock rise from around $20 to hit an all time high of almost $170 at the beginning of 2021.

It has crashed dramatically since then, as the unwinding of the pandemic, supply chain issues, high manufacturing costs and greater competition has made it hard for the company to find a foothold in the current market.

This is particularly the case given Peloton’s positioning as a luxury fitness offering, at a time when cost of living pressure is higher than it’s been in years.

The content behind the hardware has always been the highest margin component of Peloton’s offering, and this is why Barry McCarthy was enlisted to take the reins of the company.

As the previous CFO for Netflix and Spotify, he knows content.

There are a number of reasons why Peloton has decided to pivot their business model to focus on their content and digital subscriptions over their hardware.

Increased demand for digital content

Despite a reduction in at-home fitness demand post-pandemic, there’s no denying the trend for digital fitness content. Peloton are by no means the pioneer in this area, and many companies and influencers have had enormous success with digital workout platforms.

With the rise of remote fitness and a shift towards digital fitness solutions, there has been a growing demand for digital content offerings, particularly in the form of online subscriptions.

Higher profit margins

Peloton’s hardware is very nice. Its high quality and well-designed, and comes at a premium price. Even so, that also means it’s expensive to manufacture.

Digital subscriptions have a higher profit margin compared to hardware sales, and this pivot allows Peloton to generate more revenue while also keeping costs down.

Ability to reach a wider audience

In turn, digital subscriptions allow Peloton to reach a much wider audience, beyond those who can afford their hardware products. The Peloton Digital app is available for just $12.99 per month, and gives users access to all of the Peloton workouts and live classes, without the need to purchase an expensive bike, treadmill or rower.

It allows for workouts on existing equipment they might own, or even simply to access to weights workouts, plus other fitness classes such as stretching, yoga, meditation and boxing.

Obviously, there are far more people who can afford $12.99 a month as opposed to the $1,400+ purchase (or $89 per month rental) price for the Peloton Bike.

Cost savings

Producing hardware involves significant costs, such as production and distribution, while digital content is much cheaper to produce and distribute. It is also essentially a fixed cost which remains unchanged as user numbers scale up. This will allow Peloton to scale their revenue without a corresponding increase in costs.

By focusing more on their digital subscription business, Peloton can better meet the needs of its growing customer base while also increasing profitability and expanding its reach.

The bottom line

When it comes to investing, nothing is certain. No one knows for sure whether Bary McCarthy will be able to turn the company around and generate sustainable profits for Peloton, but it is possible.

Trying to pick the bottom for any stock or market is super hard (or impossible) and there’s no knowing when you’re going to get it right or when you’ll be throwing your money down the drain.

That’s why we created the Emerging Tech Kit, to use the power of AI to help.

This Kit is split between four tech verticals, specifically tech ETFs, large cap tech companies, growth tech companies (like Peloton) and crypto via public trusts.

Every week our AI predicts how these verticals and the holdings within them are likely to perform on a risk adjusted basis for the coming week, and then automatically rebalances the Kit in line with those projections.

It’s like having a personal hedge fund, right in your pocket.

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