In August 2019, six months before the start of the Covid-19 epidemic, I wrote in this column about the IPO of Peloton, a connected fitness upstart that made expensive stationary bikes and a user-friendly fitness app. “Peloton is so much more than a bike,” its co-founder and CEO John Foley noted in its IPO filing earlier that year. “On the most basic level, Peloton sells happiness.”

A few weeks later, Peloton listed at US$29 a share. The big question at the time was whether the bike was more overvalued than the stock. Regular readers may recall I wrote that I was thinking of buying the bike myself because I liked the instructors on its app but would not touch the overpriced stock. In my mind, I had rationalised that if I had a bike staring at my face every day, I would exercise more rather than let it become an expensive coat hanger.

I ended up neither buying the bike nor Peloton’s stock. At the start of the pandemic, the gym in my condo was shuttered temporarily, suspending my daily 45-minute run on the unconnected treadmill. During the restrictive months of the pandemic, I turned to an hour of running around a park near my home.

Truth be told, there were moments of regrets. At the height of the pandemic, I again looked at buying Peloton — the bike, not the stock. Indeed, I might have ordered the bike if it wasn’t for the long waiting list. The wait time for the cheapest Peloton bike at the time was up to 12 weeks. The queue for Tread+, its new treadmill, was even longer. Pay upfront now and Peloton will try its best to deliver a bike in 12 weeks. Needless to say, I went back to running in the park again.

As it turned out, shunning the bike, and the stock, was a great decision. Shares of the connected fitness had a wild ride up and bumpy ride down until it was forced to slam the breaks last month for a reset of sorts. Peloton stock peaked in January 2021 at US$167 ($225) per share. By the end of last month they had fallen to US$22.81, down 87% from their peak and over 21% from their IPO price. They have since bounced back to around US$32 on management changes, restructuring and rumours of an ultimate sale to a strategic buyer.

And, oh, Peloton slashed the price of its cheapest bike from US$1,995 to US$1,495. The original bike price was cut from US$2,245 to US$1,895. Had I bought the bike a year ago, I would have paid 30% more. These days, there are plenty of sparingly used Peloton bikes being peddled on the Internet for a fraction of what the original bike sold for during the pandemic.

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In some ways, Peloton’s woes are not much different from some of the upstart “pandemic beneficiaries’’ such as videotelephony and online chat services operator Zoom Video Communications, electronic signature firm DocuSign, and telemedicine pioneer Teladoc Health that became household names in the first 18 months of Covid-19 restrictions but have had a challenging time living up to ultra-high expectations as economies open up and life returns to some form of normalcy using gyms, hybrid work environments and actual visits to doctors’ clinics. Like Peloton, those other pandemic icons saw their own stocks soar as lockdowns began, only to fall harder as vaccines appeared. Zoom shares are down 72%, Teladoc down 75% and DocuSign down 60% from their pandemic peaks.

Yet Peloton’s problems are unique. Instead of looking at the pandemic as a once-in-a-lifetime opportunity to put itself on a stronger footing, Peloton’s management treated the lockdown and restrictions which boosted demand for its bikes, treadmills and fitness app as the “new normal”. “I see a couple of hundred million people on the Peloton platform in 15 years,’’ CEO Foley was reported as saying at the height of the pandemic. That is a CAGR of over 30% for the next 15 years.

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But as the world opened up once again, the at-home fitness gear firm was caught flat-footed. Gyms across North America have returned to levels they saw in the weeks before Covid-19-related shutdowns began in March 2020. Gym visits in the US are now at above late 2019 levels, according to Placer.ai, a foot-traffic analysis company. Planet Fitness membership in the US recently surpassed its pre-pandemic peak of 15.5 million.

The irony is that the pandemic has unleashed a worldwide boom in wellness and fitness. Global wellness spending is estimated at US$4.2 trillion in 2020, and spending on fitness tops US$600 billion every year. There were over 180 million gym memberships globally in 2018, including approximately 62 million in the US. Last year, over 74 million people went to a gym at least once in the US alone.

Peloton is one of the handful of connected fitness firms that have emerged to take advantage of wellness trend. If you buy a Peloton, you join a touchscreen-based, fitness focused, affluent community of three million bike and treadmill users who are connected to trainers through live or recorded videos. Bikes cost between US$1,495 and US$3,000, and for US$39.99 plus tax you can get an all-access membership to an array of video content with the instructors.

What Peloton has is an incredibly engaged and committed user base. The at-home digital exercise firm’s users aren’t just passionate about the stationary bike but also its “star” instructors like Cody Rigsby, Christine D’Ercole and Camila Ramón, who regularly appear on the bike’s screen. Peloton is not only connected fitness player in the field. There are tons of imitators. There is Hydrow which sells connected fitness rowing machines for US$2,199. There is the US$1,345 smart Mirror that streams virtual exercise classes for cardio exercises on the surface of the device as you work out. Mirror is made by yoga gear giant Lululemon. You have to fork out between US$2,995.00 and US$3,490 to buy smart home gym machines Tonal for weight training. Boxing enthusiasts might want to buy FightCamp equipment for US$1,299 plus US$39.90 for membership access to content. There are cheaper versions of stationary bikes from companies like Echelon and NordicTrack. Across North America, specialist gyms like Equinox now offer their own connected treadmills, bikes and Peloton-like content. The competition for Peloton is only getting started.

Unfortunately, the transition from a pandemic economy to a post-pandemic era is also proving to be fairly challenging for Peloton, which lost US$439 million just in the last quarter. Customers are shunning its stationary bikes, treadmills, weights and apparel. Its user numbers in the October–December quarter soared 66% while revenues only grew 6%.

Here’s how: Peloton was discounting heavily. At a time when most hardware makers were having trouble sourcing components from their supply chain to meet production targets, Peloton’s inventory of fitness equipment grew to US$1.3 billion from zero with long waiting lists just 18 months ago. Not only did Peloton make way too many bikes, it had way too much capacity. It bought a fitness maker for US$431 million in 2020. It also spent another US$400 million building another bigger plant in Ohio. Now, it is abandoning the half-built plant and would have no use for the other older plant for a while because it has enough inventory to last six months.

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Two weeks ago, Peloton announced that it would lay off 2,800 staffers and that founder John Foley would step down as CEO. He is being replaced by Barry McCarthy, 69, who served as CFO of music streaming firm Spotify and video streaming giant Netflix. McCarthy’s background is in consumer content companies that rely on subscription-as-a-service, or SaaS business model.

The restructuring and management changes come in the aftermath of a campaign by a New York-based activist investor Blackwells Capital, which took a 5% stake in Peloton and called for ousting of founder Foley, clearing out the entire board and an investigation of possible misconduct by senior management. Blackwells accused Peloton’s management and board of enriching themselves by selling more than US$700 million worth of stock since its IPO just as market value began to plunge. The activist firm blamed Peloton’s top management and board for “poor decision-making, lack of financial discipline, lack of credibility and misalignment of interests”. Blackwells wants Peloton to immediately explore a sale to the highest bidder because the stock will continue to languish as a standalone.

Since Blackwells emerged as an activist pushing for change at Peloton, its stock has rebounded 36%. Billionaire investor George Soros recently disclosed a new stake worth US$13.3 million in Peloton and other hedge funds have reportedly accumulated stakes in anticipation of a takeover bid. Blackwells in its presentation put a fair value for Peloton at US$65 a share, arguing that strategic investors could pay US$75 a share. Even at the high end of the range, acquisition of Peloton would likely be accretive to most strategic buyers with very modest cross-selling and penetration assumptions, it noted. Amazon, for example, would need just 2.3% penetration of its Prime subscribers to make the acquisition accretive.

Several strategic investors, including e-commerce behemoth Amazon.com and athleisure firm Nike, are reportedly interested in Peloton. Amazon could be a great fit for Peloton because of its Prime subscription offering. The acquisition will allow it to sell bikes on its e-commerce platform and deliver them to homes of 172 million Prime customers. Selling most of the bikes online rather than through expensive physical stores would drastically lower costs, as would access to Amazon’s excellent supply chain. The e-commerce giant could also include Peloton and connected fitness subscriptions in a premium Prime+ subscription bundle.

Not everyone is betting that a takeover would materialise or a buyer would be willing to pay what majority of Peloton’s shareholders want. Prominent activist investor and short seller Andrew Left of Citron Research, who has long been sceptical of the durability of the stationary bike maker’s business model, believes it might be time for Peloton to get down to business as investors are excited about the new CEO McCarthy who is well suited to help transition Peloton into a true wellness company.

Left points out that Peloton last year secretly trademarked food and meal offerings that fit its goal of wellness. Food is the largest consumer category in the US and offering meal kits and integrating food in its programming to its busy and engaged subscribers is the natural progression for Peloton, he wrote in a recent report on Peloton. “Not only does McCarthy understand the value of the subscription business, but he also understands the food industry as he is on the board of Instacart, which recently partnered with meal kit delivery company Sunbasket,” he said.

Left believes connected fitness firms could be a predator rather than a prey buying meal kit firm Blue Apron, whose market capitalisation has fallen to just US$210 million as its once high-flying stock is down 96% since listing in 2017. For Peloton, which is even now valued at over US$10.6 billion, the acquisition would hardly make a dent even if it was paying a premium over its current price. A smart acquisition, says Left, would help transition Peloton into the wellness company that was promised to shareholders at the time of the IPO three years ago.

Assif Shameen is a technology and business writer based in North America

Peloton and the end of the connected fitness ride

Peloton and the end of the connected fitness ride

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