- Peloton’s value peaked at US$50bn during the pandemic
- Company has cut jobs, outsourced production and expanded reach
- Focus is on subscriptions not hardware
Peloton believes it has turned a corner in its path to sustainability after encouraging quarterly financial results sparked a record increase in the connected fitness pioneer’s share price.
The company has failed to generate a profit for eight successive quarters and despite Q2 revenues falling by 30 per cent year-over-year (YoY) to US$792.7 million, this was better than expected.
Although hardware sales fell by 52 per cent from last year, subscription revenues rose by 22 per cent – metrics that chief executive Barry McCarthy viewed as vindication of the firm’s restructuring and shift in strategy.
“This was by far our best quarterly performance in my twelve months with Peloton,” McCarthy told investors.
“If you’ve been wondering whether or not Peloton can make an epic comeback, this quarter’s results show the changes we’re making are working.
“If this past year has been about restructuring Peloton’s business and stabilising its financial performance (and it has been), then almost certainly the next twelve months will be about capturing the moment to restore Peloton’s growth as we lean into the future of connected fitness.”
Peloton was one of the main beneficiaries of a connected fitness boom during the pandemic, which increased demand for its high-end exercise equipment and integrated software. The company expanded significantly while keeping production, sales and distribution in-house.
The easing of lockdown restrictions caused orders to decline and the value of the firm fell from US$50 billion to around US$8 billion in a 12-month period.
Former Spotify chief financial officer McCarthy was hired in early 2022 and initiated a programme of cost cutting measures, including job cuts and outsourcing, as well as plan to expand subscription income by decoupling the Peloton platform from its hardware. Peloton has also agreed retail partnerships for its equipment with the likes of Amazon and Dick’s Sporting Goods.
Although Peloton is still losing money on its hardware, McCarthy said he was unconcerned given those who purchased its equipment would most likely subscribe to its higher-margin subscription platform.
“We take a holistic view of the revenue stream and the expenses associated with both the hardware and the subscription associated with it,” McCarthy said in an earnings call.
“So, for my part, I don’t particularly care about the hardware margin or particularly about the subscription margin. I care about it on an aggregate basis, and I care about the relationship between the lifetime value of the customer relative to the cost of acquisition. And that’s the framework we use in deciding whether or not the model is working.”
The connected fitness market is far from dead – it’s just entering a new phase. Short-term demand created by the pandemic had led to a flood of enthusiasm but not the foundations for long-term growth.
High-end connected fitness equipment is very expensive and takes up a lot of physical space, which means it was never likely to become a mass market proposition. Fitness platforms like Peloton, Apple Fitness+ and others, coupled with wearable devices, are the future of the sector.
Peloton has had a painful experience of this market correction, but it’s on the right track and has the brand recognition to remain a leading light in the field – provided it can educate consumers they no longer need a fancy treadmill to access its services.