Peloton: Shift to One Peloton Club?
Some of you have asked me for my thoughts on the news that Peloton is shopping a 15%-20% stake. This is speculative, and could be completely wrong, but it’s a topic that could be overlooked.
Shopping an equity stake is interesting because Peloton ended December with $1.6 billion in cash. And it expected to end Fiscal 2022 (June) with $1.2 billion. Given the restructuring program long underway, the worst period for cash burn should be behind them. At the same time, maybe demand has fallen off a(nother) cliff. Or maybe they can’t or don’t want to cut more headcount or opex. Obviously, more cash adds flexibility in an uncertain time.
But could there be another reason? Business seems to be holding up ok. Guidance for 163k net adds and 70k net adds in F3Q and F4Q, respectively, does not seem unachievable to me. The Yipit numbers suggest they are more or less maintaining this pace.
One thing that’s clear is they just cut hardware prices, which reduces cash inflow from hardware sales. That occurred after February so it was not contemplated in their February comments. Barry clearly wants to move hardware out the door to maximize All-Access subscriptions, which has always been the gold mine of this business. Incremental subscription gross profit margins have been ticking higher and closing in on 80%. Barry has agreed that the magic of Peloton is not about the hardware, but the subscription content.
Peloton’s gross profit mix has already shifted massively towards the subscription business—last quarter it was responsible for 82% of gross profit. That’s only going to increase. Post price-cut, Connected Fitness (hardware) gross profit margins seem closer to breakeven levels. And the All-Access subscription price increases to $44 starting June 1. Barry seems to be setting up Peloton to have virtually all of its gross profit come from the high margin subscription business.
My theory for the equity stake sale dives deeper into this point.