Peloton (NASDAQ:PTON) stock has crushed analyst expectations this year. Q2 revenues rocketed 172% as users gobbled up its workout-from-home bikes. The company hiked its 2021 growth outlook to 90% and PTON stock rose 8% in after-hours trading.
Yet corporate insiders have been selling shares at a clip that begs the question, what’s wrong with PTON stock?
Excluding Founder/CEO John Foley’s stake, the remaining executives now hold just 0.07% of outstanding shares. That’s a tiny sum, considering the vast number of stock options management are granted every year.
So if insiders are selling so quickly, should investors still hold on?
PTON Stock: Insiders Shouting “Sell, Sell, Sell!”
A quick disclaimer: I’m a huge fan of e-commerce businesses. And not all insider selling signals negative news. In fact, on the face of it, PTON stock should be a strong “buy.”
Per Barron’s, University of Michigan finance professor Nejat Seyhun says if “a large portion of corporate officer and director compensation comes in the form of equity, insiders have no choice but to sell their shares to get the cash necessary for their living expenses.”
Peloton executives, however, have taken options sales to extremes.
Today, company President William Lynch owns just 1,724 shares, while CFO Jill Woodworth owns exaclty zero of all the vested shares she’s been awarded. When a company expects 90% growth in the following year, there’s something extraordinary about having all executives dump their shares so quickly.
Why Would Insiders Jump Ship?
A haunting specter has always loomed over Peloton’s seemingly unflappable growth: Fitbit (NYSE:FIT).
In 2014, Fitbit was all the rage. Sales in the fitness tracker jumped 174% as people stuffed Christmas stockings with the aptly named “Charge” and “Surge” wrist trackers that could monitor exercise activity and sleep schedules. The company’s 2015 IPO saw shares spike 140% as sales grew another 150%.
But that momentum couldn’t last.
As the market began to saturate, Fitbit’s growth began to taper off. It turned out that Fitbit wasn’t quite like Apple: once customers bought a tracker, they didn’t need to upgrade it every two years like they would with a smartphone. And Fitbit’s shares duly slumped. By 2017, the company had dropped 88% to the $5-$6 range, where it remains today.
Fitbit’s share price collapsed when it couldn’t deliver expected growth
Is PTON Stock the Next FIT?
Peloton faces a similar problem as Fitbit did: once a customer buys a $1,895 stationary bike, it’s rather hard to sell them another. So how can Peloton make sure they’re still making money while they wait for the first bike to break down?
Peloton’s management clearly understands the stakes. To answer that, they wisely implemented a $39/month membership fee for its online classes. Even if customers never buy a second bike, as least they’re still creating revenue. Peloton’s subscription fees now make up 20% of its revenue, up from 15% in 2017.
The company has also gone into adjacent businesses, such as on-demand yoga classes, treadmills and all-digital memberships. Essentially, it’s looking to replace the in-person gym with an at-home experience that can provide long-term income streams.
That’s great news. But to succeed in the long run, Peloton needs a content creation plan rarely seen in the fitness world.
Peloton Needs to Become Disney
The fitness industry has always been challenging. Bowflex maker Nautilus (NYSE:NLS) has flirted with insolvency multiple times since its 1990 reorganization. Gyms, from boutique Flywheel to mass-market 24-Hour Fitness, have folded during the coronavirus pandemic. And even in good times, gyms and fitness companies have a nasty habit of going bankrupt.
Why such volatility? Fitness companies tend to run on unpredictable customer needs. Exercise regimens can come and go just as quickly as fad diets, a fact that corporate CEOs at fitness companies have long recognized.
So to survive, Peloton has to do more than “build a community” of like-minded exercise fanatics. GoPro (NASDAQ:GPRO) tried that in 2017 and still couldn’t stop revenues from hitting a $1.2 billion ceiling. Instead, Peloton needs content creation. It’s the only way to keep users permanently engaged.
Can PTON Stock Rise To $50 Billion?
Fortunately, others have done it before. Jane Fonda enticed millions in the 1980s with her ubiquitous workout videos, as did Tony Horton of P90X fame in the 2000’s. And media giants from Disney (NYSE:DIS) to Netflix (NASDAQ:NFLX) have figured how to keep users paying monthly fees to watch grown adults do ridiculous things.
Peloton has already started down the media-creation path, now hosting thousands of on-demand and live class videos. App subscribers can find everything from meditation to strength training via their $12.99/month membership.
But to keep its membership numbers growing, the company needs far more. Because to hit its 100 million subscriber target, the company needs to look a lot less like Jane and a lot more like Walt.
And that requires a massive amount of original programming. Jane Fonda only managed to sell 17 million copies of her original workout routine. By comparison, Disney Plus has 50 million subscribers and a $1.5-1.75 billion content creation budget (plus another $24 billion on theatrical productions, ESPN and other media).
Meanwhile streaming titan Netflix has 180 million subscribers and a massive $16 billion budget. Peloton has a lot of catching up to do.
Can the high-tech fitness company do this? Perhaps. But with insiders selling with such gusto, there doesn’t seem to be much internal confidence. Investors should tread lightly. There’s a long way this $24 billion company can fall.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.