[412-code-talk] Peloton

Mark Rauterkus mark.rauterkus at gmail.com
Sun Nov 14 11:19:49 EST 2021

The newsletter, Front Office Sports, is amazing and presents these insights
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Disney Could Win Big by Acquiring Peloton

Peloton/Design: Alex Brooks

It’s been an interesting couple weeks for Peloton as the company launched a
new product, shed $10 billion of market cap, initiated a hiring freeze, and
saw their CEO lose his billionaire status. Jim Cramer has been telling
buyers to find their off-ramp.

Peloton announced earnings for fiscal Q1 2022 on Thursday of last week and
the results — while not wholly unexpected — sparked a massive selloff. The
company missed on earnings and revenue projections and slashed its
full-year projections.

The report shook out something like this:

   - EPS: -$1.25 vs. -$1.05 expected
   - Q1 revenues: $805.2 million vs. $810.7 million expected
   - Q1 average workouts: 16.6 workouts vs. 19.9 in Q4 2021

At the time of writing, Peloton’s stock price had plummeted 43% to within
$23.98 of its IPO price from 2019 and a $14.9 billion market cap, down from
a peak of $47.6 billion in December 2020. After the selloff, the company
initiated a hiring freeze to “cut costs in order to realign with sluggish

The news, however, was not all doom and gloom. Peloton also announced on
Tuesday a new connected fitness device — a digital camera that uses machine
learning to provide coaching — the Guide.

The Guide marks a move into the strength training space, though it’s
perhaps a hasty one. When compared with competitors like Tonal, Tempo, and
Lululemon’s Mirror, Peloton’s simple camera feels more akin to the
forgotten Xbox Kinect than Tonal’s $2,995 full strength training device.

Any way you slice it, Peloton is at a crossroads. Society at large is
emerging from the pandemic slumber and venturing into the real world. This
was demonstrated in Plant Fitness’ third-quarter earnings results as the
company *beat revenue projections by 13%* and saw its *highest net member
growth* in history.

At this point, Peloton has three options:

   - Continue business as usual. While revenue growth has slowed, the
   company’s user base is still climbing and Peloton has made long-term
   investments in improving production and distribution capabilities (e.g.
   acquiring Precor for $420 million, planning a $400 million in a
   manufacturing facility in Ohio).
   - Growth through acquisitions. If you believe (as many do) that
   Peloton’s main assets are its trainers and subscription content, then the
   best way to grow is to distribute those assets through more channels.
   - They might join forces with someone bigger — much bigger. Disney could
   be the apex predator that acquires Peloton as a means to drive streaming

Let’s dive a little further into the details and consider some possible

*Fantasy M&A: Peloton Buys Tonal*

The premise of Peloton buying Tonal is simple: If Peloton is going to win
the connected fitness space, it needs to expand. The company missed on
revenue projections in Q1. The main culprit? Connected fitness devices.

While subscription revenue has actually grown quarter-over-quarter since
the IPO in 2019, *connected fitness revenues are down 51% since Q3 2021.*

People seem less inclined to ride their Peloton bikes, too. Quarterly
workouts per user and total workouts recorded were both down for Q1 2022
and had flattened over previous quarters.

A Tonal acquisition would provide Peloton with an asset commensurate with
its existing product line.

   - Premium bikes and premium treadmills would join premium connected
   weight training.
   - The Guide — while a good first step — does not feel on par with
   Peloton’s brand. It’s also unlikely to bolster what is currently the weak
   spot in their topline revenue.
   - Replacing, or at the very least supplementing, the Guide with a true
   connected weight training device could help the company regain a growth
   narrative for connected fitness.

An investment in connected fitness hardware is also an investment in talent
— potentially Peloton’s greatest asset — but as connected fitness revenues
decrease, so does the distribution of instructors. Getting their faces on
Tonal products could change that.

*Fantasy M&A: Disney Buys Peloton*

Disney announced earnings on Wednesday, and like Peloton, failed to
impress, missing Wall Street estimates across the board.

While the company did add 2.1 million new Disney+ subscribers, that number
is significantly lower than Wall Street’s anticipated 9.4 million additions
in the quarter. Average revenue per user was down 9%, too.

During the company’s earnings call, CEO Bob Chapek said, “We remain focused
on managing our DTC business for the long-term, not quarter to quarter.”
With long-term growth in mind, slowing subscriber growth, and declining
ARPU, *Disney could use an injection of life.*

Enter Peloton.

While we spent ample time outlining the company’s struggles, there is a
bright spot to focus on. Subscription revenues have increased every quarter
since September 2019.

If Disney wants to supercharge its subscription growth, why not target

   - As the owner of ESPN, Disney isn’t too far removed from fitness
   - Now that Disney’s parks are back to full capacity, imagine the gyms at
   the on-site resorts within those parks being supplied with Peloton bikes
   and treadmills.
   - For Peloton, that would create instant demand for connected fitness
   devices, while Disney would get a differentiated streaming product and more

It’s good timing for an acquisition from a capital markets standpoint.

M&A deals are all the rage and, with a prolonged bull market, producing
high stock prices. High stock prices mean that M&A deals can be executed
with less cash and more of a company’s equities. Disney’s stock price,
although down after earnings, is within 15% of its all-time high.

Meanwhile, Peloton’s stock price is down 70% from it’s all-time highs in
December of last year. Pitchbook data suggests that 2021 has been the year
of stock-driven M&A. *Nearly 50% of all deals were paid for with either
stock alone or a combination of shares and cash*, compared to 40% during
the same period in 2020.

Market dynamics, potential for subscription growth, and new access to
Disney’s parks are all strong reasons for an acquisition.

While it might be difficult to convince John Foley to join forces with The
Mouse, it could be just what his company needs to grow into its
post-pandemic identity.

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Mark Rauterkus       Mark at Rauterkus.com
Webmaster, International Swim Coaches Association, SwimISCA.org
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