Peloton’s investors may have seen this movie before in Netflix
Guidance was worse. Peloton is now forecasting total revenue for the June quarter of $700 million at the high end of its outlook, $120 million lower than what Wall Street had been expecting, while guidance for 2.98 million connected fitness subscribers came in just under what analysts had forecast.
Under its new chief executive officer Barry McCarthy, who was last Netflix’s chief financial officer and spent more than a decade at the company, Peloton is shifting focus from hardware to software in an effort to reignite its stock. Before Peloton’s report Tuesday, its share price was down more than 90% from where it rang in the start of 2021. Shares fell another 16% in early morning trading.
Right now, Peloton looks tired. It its quarterly shareholder letter—historically illustrated with motivated, fit Pelotoners, but now featuring just words—Mr. McCarthy was clear that he has taken on an all-consuming turnaround project. He admitted on Tuesday’s call he had to just “put a pin” in Precor, the $420 million commercial fitness acquisition Peloton closed on last year, until he has time to address it.
Moving away from hardware and physical manufacturing, Peloton will lean into connected fitness as a “strategic choice.” Some of the first steps have been to drop the price of its bikes and treadmills once again, while raising the price of its connected fitness subscriptions.
True to tech-fashion, Peloton is also leaning into “FAAS,” or fitness-as-a-service. Customers can now get a Peloton bike and an all-access content membership for less than $60 a month from select US showroom locations. There is an added fee for delivery and set up, but no fee if the customer decides to cancel and return the hardware.
The company has strategically priced its subscription package such that it appears financially attractive to consumers, relative even to financing an outright, unbundled purchase. Early signs, at least, are good: Peloton said it has seen steady increases in growth with the new program “on the order of 90%+ uplift currently” compared with its control markets.
In theory, Mr. McCarthy’s new strategy makes sense. The economics of Peloton’s streaming business have long looked better than hardware. And historically, subscription-based models have tended to generate higher valuations than manufacturers do.
But the move is ill-timed, as the market has turned against all things tech, even the streaming giants. Netflix shares lost over a third of their value in one day last month after the company said its paid quarterly subscribers fell for the first time in over a decade.
Mr. McCarthy said Peloton’s goal remains reaching 100 million members—that is a goal put forth by former chief executive John Foley in 2020—from around seven million now. That goal was a stretch then, when gyms were closed down as a result of the pandemic. Now it looks even more far-fetched.
Of course there are huge differences between the respective businesses at Netflix and Peloton, including the type of content, the market size, the subscription price points and the stage both companies are at in their life cycles.
But the similarities are worth considering too. Netflix initially drew subscribers because of its premium content, much like Peloton. Today, both industries face an inundation of solid competition, much of it less expensive by comparison. Virtually every exercise class can now be done at home via an online subscription, from Bar Method to Barry’s Bootcamp.
Mr. McCarthy teased many initiatives Tuesday toward faster growth, including broadening its distribution from third-party sellers, gamifying workout experiences, pushing brand awareness for its digital app, going for more international growth and expanding the rollout of its so-called FAAS bundle. It is a lot of big ideas with very little in the way of material plans. Already, Peloton mentioned it had seen a small increase in cancellations due to its announced connected fitness subscription price increase—which hasn’t even taken effect yet.
Then again, it could have been worse: At least there was no mention of ads.
Write to Laura Forman at [email protected]
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