Back in February, I weighed in on news that a bidding war was potentially taking shape for one of the pandemic’s darling stocks.

I’m talking about Peloton (Nasdaq: PTON).

It has only been a few months since the Wall Street Journal reported that Amazon was mulling a $12 – $15 billion takeover bid, triggering a strong 30% pop in the stock. The company has ambitions in the connected fitness market, having already developed its own wearable wellness tracking device (Amazon Halo) to compete with Google’s Fitbit.

But Amazon wasn’t the only potential acquirer in the rumor mill, either. Nike (NYSE: NKE) is making waves in the connected fitness market, for one. Apple (Nasdaq: AAPL) was another name that made sense, too. Tim Cook & Co have been investing heavily in this space and are already reaping rewards from AAPL’s monthly fitness subscription service.

It makes sense that these companies would all have an interest in PTON. After all, this isn’t your parents’ bike or treadmill we’re talking about here. These sleek devices come with all the modern bells and whistles you would expect, including wireless blue-tooth connectivity, high-quality soundbars, and 24-inch touchscreen displays. With a luxury price point to match, ranging from $1,495 to $4,295.

Most buyers subscribe to a monthly package of unlimited live classes and other such content. Peloton has hired dozens of top-notch instructors across multiple disciplines (from strength to dance cardio) and cultivated a vast library of 2+ million songs for those who need some musical inspiration while they exercise. There is also an almost endless menu of on-demand videos set in scenic locales.

It’s far more entertaining to pretend you are biking through the Italian countryside or running along the beach than simply staring at your bedroom wall. You can even challenge friends to a race. Some applications are closer to playing a video game than working out. That helps explain why Peloton’s customers are in it for the long haul.

What Happened With PTON?

So what happened? Well, as far as a takeover is concerned, nothing happened.

Gyms have re-opened, and Peloton is struggling. That much is obvious. The deeper question is why. After all, those same gyms were open before Covid, yet the company couldn’t deliver its bikes fast enough.

In the meantime, the company has experienced wave after wave of bad PR. Former CEO and co-founder John Foley was ousted from the company. Slowing demand combined with overinvestment in manufacturing led to a glut of products. And then, of course, the market as a whole turned — and tech-heavy former pandemic darlings fell deeply out of favor.

The company doubled its sales in 2017, doubled them again in 2018, and then again in 2019 – long before we ever heard the term “social distancing”. So it seemed that demand for its high-end connected fitness equipment wasn’t necessarily dependent on pandemic tailwinds. Regardless, the sails have gone limp and the company is dead in the water right now.

Today, Peloton is now valued at just over $3 billion. The company is worth less now than it was when it went public – before the pandemic…

Product sales slumped to $594 million last quarter, versus $1.0 billion a year ago. For a business accustomed to triple-digit growth, that unexpected 40% decline hit hard — exacerbating the glut of unsold inventory.

On the bright side, high-margin subscription income continues to build. But it hasn’t been enough to keep operating profits from plunging. The company has suffered a $1.5 billion loss over the past nine months. For perspective, it only has $879 million in cash on the books.

At the rate it has been burning cash, you can see why management just went knocking at JP Morgan and Goldman Sachs to obtain a sizeable line of credit to recapitalize and stay afloat during these challenging conditions. This borrowing may decrease the need for a dilutive stock offering.

Unfortunately, heavy fixed expenses (like instructors’ salaries) are tough to throttle back. Management has identified $450 million in cost reductions that can be streamlined next year, but these initiatives take time. And the market isn’t exactly known for being patient.

Closing Thoughts

Peloton has been using terms like “realign” and “reshape”. These are great buzzwords. But in my experience, turnarounds are easier said than done.

The lower stock price may look more inviting to potential suitors like Meta Platforms (Nasdaq: META), which is yet another name with a keen interest in the connected fitness space. Still, while takeovers can provide a nice pop, I don’t recommend speculating on questionable businesses that can’t stand on their own.

I still believe Peloton can right the ship, but deteriorating financials have called the timing into question. It might be worth revisiting the stock once there is tangible evidence of a recovery underway. But for now, if you’ve taken a flier on PTON, I recommend cutting your losses and moving on.

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