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Peloton: the manufacturer of the exercise bike must peddling

It’s time for a new lead. That was the message to Peloton from Blackwells Capital. Active Investor calling for the connected fitness equipment maker to give CEO John Foley the boot and put the company up for sale.

Blackwells, which has a 5% stake in Peloton, has $41 billion in cause to incite change. In a span of 13 months, Peloton has gone from a pandemic, staying at home with a market valuation of $50 billion into a $9 billion crisis company. The stock currently trades below its 2019 list price of $29.

That means demand for Peloton’s pricier, internet-connected exercise bikes and even more expensive treadmills will drop as vaccinated Americans return to the office and the gym Fitness reopened. It’s not something the company can control. But the product recall has also damaged its image and sales. So there is competition from the likes of SoulCycle, NordicTrack, Hydrow and Mirror.

Efforts to raise productivity are costly and inefficient. These include the $420 million acquisition of exercise equipment manufacturer, Precor, in December 2020 and the decision to spend $400 million last year to build a factory in the US.

Those actions added to the company’s cash burn. It reported a negative operating cash flow of $561 million in its last fiscal quarter. In November, it raised $1 billion through a discount stock sale.

Lex used to be alert that the company’s business model – which relies on selling equipment to drive sales growth and profits – is difficult to scale. Four-fifths of Peloton’s revenue comes from equipment sales. However, longtime loyal customers won’t buy a new bike or treadmill every year.

Stuck with excess inventory and falling demand, the losing company has few options. It is said to have halted production of some products and is considering cutting its workforce.

Peloton could be a good data purchase for a tech company like Alphabet or Apple that’s interested in fitness hardware. But even they might think twice about the price. About 6.2 million people sign up for Peloton’s digital workout classes. With a current market cap of $9 billion, that equates to about $1,450 per customer.

Executives must recognize the need for change. The dual-class share structure allows Foley and other insiders to control a majority of the company’s voting rights. The Blackwells face a rough patch in their worthwhile campaign.

The Lex team is more interested in hearing from readers. Let us know what you think of Peloton in the comments section below.

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