Peloton Stock Just Got a Whole Lot More Interesting


On September 12th Peloton Interactive‘s (PTON -8.80%) The new management announced a bombshell development: Peloton co-founders John Foley and Hisao Kushi are complete out at the connected fitness company.

Shareholders certainly want to know if this news is good or bad. But to be honest, this trend could go either way. As we’ll see, there are reasons why this might not be good for investors. But I tend to think it’s a long term positive, which I’ll explain.

Why Foley’s exit could be bad

Peloton’s official press release hailed Foley as a “visionary” who played an integral role – not just at Peloton, but in redefining the home fitness experience overall. The simple idea of ​​combining at-home exercise equipment with in-studio coaching videos was a novel approach when Peloton started. But it has since been emulated by every workout hardware company looking to move with the times. Foley helped start the trend.

A visionary founding CEO is often seen as an important part of a successful business. Investors love it, and there’s even an exchange-traded fund (ETF) based on this exact idea. It makes sense. Who is more interested in a company than a founder? And who is more likely to see where an industry is going than the visionary who foresaw where the industry is today? Peloton may have lost this after Foley and Kushi are gone.

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Additionally, Foley has plans that could motivate him to sell his Peloton shares. In Peloton’s official press release, Foley said, “Now is the time for me to start a new professional chapter. I’m passionate about building businesses and building great teams, and I look forward to doing it again in a new environment.” In other words, Foley is starting a new business and may need money to get it off the ground bring.

Foley owns, both directly and indirectly, over 6.6 million shares of Peloton that he could liquidate to fund his next venture. For his part, Kushi owns far less than Foley, with around a million shares indirectly owned. But he could also potentially try to sell. (These figures are for shares and exclude options and restricted stock units.)

Foley and Kushi’s sale of their stakes is more of a short-term risk for Peloton stock. It could put downward pressure on stocks. But the bigger risk for Peloton in the long run is losing the vision and charisma that made it the beloved brand it is today.

Why that could still be good for shareholders

Foley was successful as a visionary. But I think it’s fair to say that Peloton was poorly managed post-IPO, and that’s the main reason the stock is down more than 90% from its high. For that reason, it could be a good thing to have the company under entirely new leadership without the old one present.

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For example, under Foley’s leadership, Peloton ramped up bearing production when growth began to slow. This has presented new CEO Barry McCarthy with quite a dilemma. In recent quarters, McCarthy has shut down in-house manufacturing, outsourced (and slowed) production of new inventory, and tried to find creative ways to stimulate demand for its products. But there’s still a long way to go to undo the damage and get back to positive cash flow.

Chart of PTON Holdings (Quarterly).

PTON Holdings (Quarterly) data from YCharts.

I wouldn’t be too hard on Foley though – being a charismatic visionary and being a numbers cruncher are different skills. Remember: the first bike didn’t ship until 2014, while just five years later it already had its initial public offering (IPO) with a valuation of $8 billion. The speed of this growth did not leave much time for the leadership team to develop.

McCarthy, on the other hand, has plenty of experience as a manager Netflix and Spotify, which is why it might be a good thing to have Peloton’s co-founders completely out of the picture. McCarthy is forgoing growth opportunities (prior management probably wouldn’t have) because he understands the importance of positive cash flow. The company needs that now.

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With Foley and Kushi gone, Peloton’s new leadership team can make the tough decisions and do what needs to be done – whatever that is. And while it didn’t say anything, that could potentially include sale the enterprise. Perhaps Peloton makes more sense as part of a larger company.

Separate from that discussion is what this all means for Peloton stock. If Peloton can turn its dust-collecting inventory into positive cash flow in 2023, then I’d bet further downside is limited. And to be fair, Peloton is making strides towards that goal, even though there’s still a lot more to come.

However, to deliver market-beating returns, Peloton’s new executives must also grow the company. And for the time being, this result is possible, but far from certain.

Jon Quast has positions at Peloton Interactive and Spotify Technology. The Motley Fool has positions in and recommends Netflix, Peloton Interactive, and Spotify Technology. The Motley Fool has a disclosure policy.





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