Exactly two years ago, Peloton Interactive (PTON) brought in former Spotify (SPOT) and Netflix (NFLX) CFO Barry McCarthy as CEO, hoping for a turnaround. Despite strong market performances in 2021, the company continued to struggle, precipitating a 76% drop in PTON stock value.
McCarthy, never one to sugarcoat, embarked on an elusive turnaround plan that has drawn out over an interminable two-year stretch. As PTON’s stock continues to plummet to unprecedented depths, revealed a further hit following the release of its fiscal Q2 earnings.
As Peloton’s turnaround seems to be getting lost in a labyrinth of challenges, rumors of a likely acquisition by tech titan Apple (AAPL) have gained traction. We delve into this possibility.
The Prolonged Turnaround
In a recent update, McCarthy acknowledged that certain initiatives have yielded promising results, including the success of Peloton’s bike rental program. The company is contemplating expanding this business model to other markets, such as corporate wellness. Furthermore, partnerships with Amazon (AMZN) and Dick’s Sporting Goods (DKS) have facilitated a whopping 74% year-over-year unit growth in the channel last quarter. Additionally, the subsidiary Precor’s improved performance generated $70 million in Q2 revenue. However, initiatives like the co-branded bike with the University of Michigan, which didn’t sell well, have been shelved. McCarthy also admitted that Peloton fell short in member support but has since revamped the team.
During the fiscal Q2 earnings call, McCarthy acknowledged the lack of product innovation but pledged “significant product innovation” over the next couple of years.
Extended Growth Timeline
McCarthy’s primary objectives for Peloton were to restore revenue growth and transform it from a cash-chewing enterprise to one capable of generating free cash flows.
In Peloton’s fiscal Q2 shareholder letter, McCarthy revised the target for attaining free cash flow positivity to only fiscal Q4, contrary to the previous full-year fiscal 2024 forecast. Revenue growth is also expected only in fiscal Q4, a delay from last year’s predictions.
Stock Projections
Analysts have long looked unfavorably upon Peloton’s prospects, and the company’s discouraging 2024 guidance did nothing to alter that perception. With a consensus rating of “Hold,” PTON stock carries a mean target price of $7.55, nearly 67% higher than its recent closing price.
Apple’s Potential Interest
Rumors of Apple’s potential acquisition of Peloton periodically surface. Apple has expressed interest in the healthcare industry, with CEO Tim Cook stating as early as 2019 that improving people’s health would be “Apple’s greatest contribution to mankind.” The proposition gained momentum when Gene Munster, co-founder of Deepwater Asset Management, suggested that the “stars are starting to line up” for such a move. Munster cited Cook’s healthcare focus, Apple’s subscription revenue growth ambitions, and Peloton’s alignment with Apple’s subscription strategy, boasting approximately 3 million connected fitness subscribers. Apple’s purported interest in Peloton has been paralleled by previously rumored interests from Amazon and Nike (NKE).
In conclusion, the question of whether Apple should acquire Peloton is a divisive one. Yet, the tantalizing prospect of a tech giant rescuing a struggling company like Peloton cannot be dismissed outright, particularly as various tech behemoths, from Microsoft (MSFT) to Alphabet (GOOG), increasingly recognize a vast healthcare opportunity.
