Peloton’s rise, fall and attempted comeback

On the night of Sept. 26, 2019, hours after Peloton shares went public, employees dined on seafood and sipped champagne in the glittering halls of Hudson Yards as they discussed what they’d spend their newfound paper fortunes on.

During a lavish fete in the company’s soon-to-be New York City headquarters, some talked about the new car they’d buy, the second home they’d always longed for, the student loans they’d finally be able to pay off. 

“It felt like nothing could get in the way of all that,” said a former engineer who attended the party. 

It was the beginning of what former employees described as Peloton’s age of “opulence” — a brief era fueled by blind optimism and hubris that took its stock to dizzying heights only for the company to suffer a stunning fall from grace a little over two years later. 

Since reaching a peak intraday share price of $167 in December 2020, Peloton’s stock has crumbled to $13.60 a share. That’s about half of its opening share price of $27, after the IPO was priced at $29. Its market cap, which once surged to more than $45 billion, has shrunk to about $4.7 billion. Shares are up about 71% so far this year, however.

The connected fitness company carved its way into the mainstream as a solution to shuttered gyms during the early days of the Covid pandemic. But then it made the critical error of planning for that demand to last, even as the virus waned and lockdowns lifted.

The company has been gutted by plummeting sales, a shift in consumer demand and a scandal after a six-year-old died and dozens of others were injured in incidents involving the Tread+, leading to a costly recall. 

The cascading problems led co-founder and CEO John Foley to step down just over a year ago. He was replaced by Barry McCarthy, a former Spotify and Netflix executive, who ushered in an aggressive turnaround plan and a new era of fiscal rigor.

Since McCarthy took the helm, he’s managed to bring the company back from the brink of extinction by improving its free cash flow levels from negative $747 million to negative $94 million as of the end of its most recent fiscal quarter.

In the three months that ended Dec. 31, Peloton’s net losses shrank to $335.4 million, the narrowest loss it has marked since its 2021 fiscal fourth quarter. The company celebrated the quarter as its best performance since McCarthy took over. In an upbeat letter to shareholders, he offered a glimmer of hope that a comeback could be on the horizon. 

But the company is still losing hundreds of millions of dollars each quarter, and demand for its signature connected fitness products continues to fall. It has all but stopped manufacturing the machines as it works to offload $1.05 billion in inventory as of the end of its most recent fiscal quarter. Between July and December last year, Peloton spent $0 on work-in-process inventories, or products that are actively being manufactured, securities filings show.

Under McCarthy’s leadership, Peloton is pivoting away from hardware and transforming into a software-first company that’s focused on its content — and the sticky subscription revenue that it brings.

But the jury’s still out on whether that will be enough to save the business.

For this report, CNBC spoke with 16 current and former Peloton employees, the majority of whom declined to be identified because they are not permitted to speak publicly about the company. Peloton did not provide a formal comment for the story but did provide access to executives.

Foley, meanwhile, spoke briefly with CNBC by phone, saying that while Peloton’s stock has fallen, the company has not.

“It is a fantastic company and a fantastic team and a fantastic community,” Foley told CNBC. “And I like their chances.” He declined to comment further.

When Foley, a former Barnes & Noble executive, created Peloton in 2012, he sought to capture the popularity of spin classes such as SoulCycle and bring them to the living rooms of busy high-earners. 

At first, the company’s stationary spin bike that came with virtual classes developed a loyal following, but it was small. That changed when the Covid pandemic hit in early 2020, triggering lockdowns and shuttering gyms.

Demand for Peloton’s bikes skyrocketed far beyond its expectations, and it was seeing sudden growth it had initially hoped to experience over five to seven years. The company became a Wall Street darling and a household name. 

During virtual all-hands meetings, Foley would tell staff the company’s explosive growth was just the beginning and the stock price would reach $1,000 a share, three former employees said. 

“There was a lot of blind trust … We all were like, okay, let’s go,” recalled the former engineer. “They always had this blind optimism where they were like … we’re going all the way to the top.”

Peloton set off on a hiring spree, developed new connected fitness products and spent whatever it took to get bikes delivered to homes. Field operators were offered thousands in hazard pay to keep delivering bikes through the pandemic’s darkest days. In some regions, the company was spending nearly $500 per final mile delivery, not counting how much it cost to get the equipment shipped from overseas, a former field operations supervisor said. The goal was to keep final mile delivery rates around $250 per delivery in some regions, the supervisor said.

Demand for Peloton’s equipment continued to explode as the pandemic trudged on. So did its stock, making some of its employees and executives suddenly very wealthy, at least on paper. 

“The majority of us, we weren’t naive to the fact that, especially in New York, there were people outside in refrigerated trucks because they didn’t have enough room in the morgue, but at the same time, we’re looking at our Morgan Stanley accounts and now we’re all worth, you know, millions,” said a former designer, whose net worth reached $5 million at the height of Peloton’s success. “I don’t think any of us were rooting for the pandemic to continue, but as long as it was going on, it was obviously good for business, and it was good for a lot of people’s bank accounts.”

In November 2020, Peloton said its sales surged 232% to $757.9 million compared with the prior-year period. By the end of the holiday season that year, the company was celebrating its first $1 billion sales quarter and a rare profit — $63.6 million. 

While demand stayed strong, worldwide supply chain constraints made it difficult to keep up. Customers began to complain about monthslong delivery delays, as well as issues with the bikes once they finally arrived.

In response, Peloton spent $420 million to acquire fitness company Precor and its U.S. manufacturing capabilities. Later, it pledged another $100 million to airlift products to avoid clogged ports — a move widely criticized internally as a horrible decision, according to numerous former staffers. 

“They were like, we have so much money, we’re unstoppable,” said the former engineer. “We just need to deliver the bikes, we just need to get the bikes into homes, we just need to do this.”

Peloton’s staff became so bloated, the former engineer said, it felt as if the company was hiring as a form of “empire building” that didn’t “feel based in real need.” One former employee said there wasn’t enough work to stay busy and there was nothing to do half the time.

“I think all of us were drunk on the growth that Covid brought, and no one paused to say like, hey, maybe this is a game of musical chairs, and what happens when the music stops?” said the former designer. “Like, we can’t keep expecting people just to stay inside and not go to the gym.”

In May 2021, the company announced a $400 million investment into Peloton Output Park — a sprawling factory it sought to build in Ohio to shore up its U.S. manufacturing capabilities and reduce its reliance on overseas partners.

Behind the scenes, though, the company was hemorrhaging money. Revenue had begun to slow dramatically as Covid vaccines became widely accessible and people began venturing out again.

“We were trying to catch up and spending, spending, spending to catch up, and by the time we finally caught up, demand fell off,” said the former field operations supervisor. “Over time we kind of saw how the company responded to the pandemic and then misread the pandemic. It was kind of like, wow, it kind of feels like we got sold down the river.”

Peloton’s stock price was slowly sliding down, and employees began to panic as they saw their paper wealth evaporate. “People lost everything,” the former engineer said. “People lost their dreams.”

Colleagues with children who planned to use their earnings to buy houses and grow their lives saw those hopes dashed, the person said.

“We always had millions of loyal subscribers who loved the product, just like love it, and it was hard to understand always how we f—ed that up so badly considering the loyalty and the cult-like nature of the whole thing, you know?” the former engineer said. “It was like, wait, what?”

By the end of March 2022, the company’s net losses reached $757.1 million, which is more than the company lost between the 2017 and 2021 fiscal years combined, according to securities filings.

By June 30, the end of Peloton’s fiscal year, the company’s full-year net loss ballooned to $2.83 billion. 

When McCarthy took over as CEO last February, some worried the company would be so focused on dollars and cents, it would lose its innovative spirit. But others breathed a sigh of relief to have what felt like an adult in the room, someone who’d be able to clean up a multibillion-dollar mess. 

“He seemed the polar opposite of John,” said a former manager on the production team who worked under McCarthy for several months. “I think everyone was kind of like, OK, this is a real legitimate business guy with a solid background.”

“We were all hopeful,” the former manager said. “I was certainly hopeful with his acumen and experience, but I knew it was going to come with some very hard decisions.”

Soon, the company pulled the plug on Peloton Output Park, shifted logistics and manufacturing to third-party suppliers, tried to sell Precor, and cut its workforce by more than half. 

Since the beginning of July, the company has closed or committed to shuttering 52 of its 136 global retail stores, and workers who can’t be absorbed into other stores are still being laid off, the company said.

While McCarthy has said at least twice that job cuts were finished, the company has also made clear its retail restructuring is ongoing and will take time.

Since he took over, McCarthy has developed a reputation for being very hands-on. A new refrain — “Barry says” — has begun echoing through its Slack channels and emails.

“They’ll be like, ‘OK, we need to get this done because Barry said we needed to do this,'” said a designer who works at the company. “I’ve worked for companies the same size as Peloton before, and usually the CEO is not saying to do something.” McCarthy, on the other hand, is “very involved in the product and has been really pushing the business forward,” this person said.

The turnaround plan, mass layoffs, constant media coverage and upheaval in the company’s C-suite have left some employees stunned. Others, though, were quick to come to the company’s defense. 

“Current strategy is spot on, things are going well, morale is high, Barry is a visionary, we’re excited for the upcoming year,” one manager said in a LinkedIn message. 

Peloton’s chief content officer, Jennifer Cotter, who joined the company in 2019, said becoming the CEO of a founder-led company would be a “daunting” challenge for anyone, but she was “amazed at how quickly [McCarthy] zeroed in on the areas we needed to focus on.”

“Barry came in at a time when that was the leader we needed,” she told CNBC. 

Peloton’s stock soared 26% on Feb. 1, when the company announced its fiscal second-quarter results, which indicated some progress in McCarthy’s turnaround plan. For the last three quarters, subscription revenue has outweighed hardware sales. About half of the people who pay for Peloton’s digital app are using it on other companies’ hardware, a notion that was once anathema to the company’s vision. McCarthy previously told CNBC that Peloton may be at a “turning point.” 

Instead of developing new connected fitness products, Peloton’s product team is focused on improving the hardware they already have by adding new features, and employees have felt a shift of focus toward the company’s content and app.

Cotter, the brains behind Peloton’s content machine, was told to keep doing what she was doing when McCarthy took over and to not “let anyone get in your way,” she recalled. She also noted content is “pretty interconnected” with product and there is a “real symbiosis” between both sides.

While the apparent shift has led to some friction between Peloton’s product and creative teams — one employee said the company was experiencing an “identity crisis” — McCarthy appears to be leaning into the core of what has always made Peloton special: its virtual fitness classes. 

“Fitness has been pretty literal in the world, and there’s tons of people that have been systemically left out of fitness, and we intend to make those individuals feel included in whatever that means for them,” Cotter said. “I bet my whole career on the fact that this rise is happening, so, it’s happening.”