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European Financial Markets

Peloton falls off its bike after warnings by CEO

Tuesday was a busy day at Peloton. First, the new CEO Barry McCarthy pondered at length about Peloton's restructuring plans.

Too much inventory, which first has to be sold, costs money. Costs have to come down, but the cost reduction programmes are underway. Growth is to be achieved through new subscription models. This all sounded good for a company that is now several steps away from market darling status.

As recently as December 2020, Peloton shares were trading at USD 151. On 10 May 2020, they were trading at 12.90, down about 90%. The chart looks like the altitude chart of a Tour de France mountain stage Alpe D'Huez before the last climb.

Then in the last paragraph of the letter to shareholders dated 10 May 2022 came the bombshell. Peloton was only "thinly" capitalised for a company of its size. In tough negotiations with Goldman Sachs and JP Morgan, they negotiated a 5-year credit line of USD 750 million. This is in addition to the current cash position of USD 879 million. A year ago it was USD 1.1 billion.

Analysts expected a net loss of USD 267 million. The reported net loss was USD 757 million, almost triple.

In reaction, Peloton's share price plunged by almost 20%.

Thus, Peloton is burning through cash faster than it is good for the company. Only how is Peloton supposed to get back on the growth track?

Peloton users are increasingly returning to the gyms they couldn't get into during the pandemic and the current fitness equipment like the bikes and treadmills are sitting like lead in the shops. This eats up money.

Covid measures are being relaxed en masse, making it difficult for the company to attract new customers who continue to buy the expensive equipment, which can cost around EUR 2,000. After all, new device purchases account for about 60% of the company's revenue.

Peloton wants to steer the company away from equipment sales towards a "global connected fitness platform" with 100 million members. Then the core product would be an app and no longer the bikes. An ambitious goal, since according to analyses not even 200 million people have a gym membership.

The new CEO, Barry McCarthy, who has been in office for about 4 months, does not seem to lack ambition. In his career, he has had stations such as Spotify and Netflix behind him, so he has the right experience.

Whether he succeeds in this drastic strategic realignment remains to be seen. The challenge is akin to the Alp D'Huez mountain finish in the Tour de France. We will see if Barry can earn the white dotted shirt of the King of the Mountains.

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