Tech stocks have found it hard to make any progress this year, with interest rates being hiked and inflation inching up. Peloton (PTON) was one of the few stocks to fare well during the pandemic, and it’s no coincidence that recent news about its struggle to generate consistent revenue is weighing the stock down.
Peloton Interactive is a leading fitness technology company that offers live and on-demand group exercise classes from its interactive TVs. It has a large customer base and an impressive number of instructors available for live courses.
Due to a lack of available opportunities, there was a huge increase in demand for fitness-related classes during the pandemic. However, the company has had trouble moving with the times; post-pandemic demand has plummeted, and the firm has been forced to close production lines, lay off employees, and reevaluate its management team.
Peloton bikes are a hit, but they can’t survive on hardware alone. The price cuts to the bikes make you question whether the segment will be profitable, which is important because its hardware sales were already quite thin. The goal is to sell the bikes at a discounted price to generate some revenue before prices rise and subscriptions can’t be offered on the cheap.
The company is increasing the monthly subscription price in the U.S., which will go up from $39 to $44 per month. The news did not go down well with investors, who promptly punished the stock.
Based on its performance right now, it doesn’t look like Peloton is the best investment. Let’s give it time to make changes before considering a comeback.
Rate Hike Comes at the Wrong Time for Peloton
Although Peloton is trying to expand its subscription base, Netflix (NFLX) has just reported a high level of subscription fatigue. You might think that there is no connection between the two companies, however, there is more than a passing connection between Peloton and Netflix. Thanks to the boom in stay-at-home subscriptions and trends, these companies have both seen substantial growth in their user base.
Unemployment is declining, and consumers are more willing to spend when they have the cash to spare. They look at shopping differently, so brands need to change strategies accordingly. With the economy undergoing a major rehabilitation process, there’s a lesser need for workers who work exclusively at home.
It seems like Peloton is taking a different approach to its subscription service. Many other similar business models with subscription services also struggle with churn, so it’ll be interesting to see how they try to make their product stand out.
There will be tougher competition in 2022 as more gyms and parks open up. However, the company is now looking to increase rates during an extremely testing time for streaming.
Peloton is Trying to Streamline Changes
When dramatic shifts in society occur, both more and lesser established companies must adapt to survive. Peloton is making difficult decisions to secure their future, but they’re certainly not out of the woods just yet.
John Foley, the CEO of Peloton Inc., is stepping down after the company decided to lay off 20% of its workforce. Despite this, there’s more encouraging news on the leadership front.
Many people know John McCarthy as Netflix’s CFO, who started his career at the company when it was just a mail-order service. He remained with the company in a new role when it became an online subscription-based OTT company, and he was also responsible for the IPO. He has excellent experience with subscription-based products, and his current project suggests that he is good at numbers. This is exactly what Peloton needs at this point.
Peloton is facing some pressure from investors to “do something,” This appointment will hopefully provide a new set of insights into its finances and business model. Investors are still unsure of this company, but what Peloton has done is a potential step in the right direction. Management is showing an active effort to resolve outstanding issues, which can be good for both existing and new investors.
Wall Street’s Take
Peloton has a Moderate Buy consensus rating, based on 15 Buys and eight Holds. The average Peloton price target of $46.32 implies 163.78% upside.
Bottom Line
Peloton is now looking to cut back on its spending by $150 million this year. The company is focusing more on efficiency, which is important for them. Although the freeze in hiring activities has come as somewhat of a shock, one can understand its reasoning. The company needs to be smart with its budget if it wants to survive and grow.
Peloton finally took some much-needed steps. However, it’s not going to be all smooth sailing from here. Now is the time to be patient, evaluate the execution of the first phase of this transition plan, and decide if it has any impact on future developments.
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