Peloton (PTON) Shares Pick Up A Little Speed As Activist Investment Firm Seeks Major Shakeup
3:39 pm Monday, January 24th, 2022
After a whirlwind week in which Peloton (NASDAQ:PTON) denied a CNBC report that it’s shutting down production of all its products, while also raising Q2 adjusted EBITDA guidance, the embattled company is once again under the spotlight. The connected fitness equipment maker has drawn the ire of Blackwells Capital, an alternative investment management firm that owns a ~5% stake in PTON. In a highly critical letter to PTON’s Board of Directors, the firm called on the Board to remove CEO John Foley and argued that PTON should put itself up for sale.
Among the many grievances that Blackwells Capital holds against Foley, its assertion that he has failed to accurately forecast demand, churn, and product returns may be the hardest to argue against. Looking back to last year, PTON raised its FY21 revenue guidance when it reported Q2 results in February, only to lower it a few months later in its Q3 report. Similarly, the company issued upside FY22 revenue guidance in its Q4 report, only to sharply cut it when it reported 1Q22 results on November 4.
In Foley’s defense, the demand destruction that developed in the second half of CY21 was far more severe than many analysts and investors envisioned. While a slowdown was widely expected due to the reopening of gyms and the return of normalcy to people’s lives, few foresaw that PTON’s revenue growth would plunge to single digits (6% in 1Q22) from triple digits (232% in 1Q21) just one year earlier.
However, even before PTON’s growth rates abruptly turned south, it was clear that a slowing period was on the horizon. In our view, this is where Blackwells’ forecasting complaint resonates most. In particular, these two items now look especially dubious:
On May 24, 2021, PTON announced plans to invest $400 mln to build a factory in Ohio. Originally slated to begin production by 2023, the New York Post reported last week that PTON is delaying the opening until 2024 due to high inventory levels and dwindling demand.
Last November, the company announced a $1.0 bln equity offering after commenting during the 1Q22 earnings conference call just two weeks earlier that it didn’t need to raise capital.
Foley does deserve credit for propelling PTON to incredible heights when it was a darling of the stay-at-home stocks during the onset of the pandemic. From early 2020 through the end of 2021, the stock soared by an astonishing 740%. Equally as astounding, those gains have been nearly completely wiped out, as PTON went from boom to bust at warp speed. The company has made some progress in its goal to reduce operating expenses, but one of the biggest issues facing PTON is the total loss of confidence among its investors. To remedy that situation, major changes may indeed by necessary.
