Peloton Outage Overshadows Even Bigger Headwinds for PTON Stock

Covid-19 beneficiaries have been hit hard as new daily cases continue to trend lower. Last year, Peloton (NASDAQ:PTON) stock hit a 52-week high of $130. Today, the stay-at-home fitness company is a shell of its former self, trading in the $30 range. Making matters worse, Peloton’s fitness services experienced a major outage today around noon. As a result, many subscribers were unable to access live and on-demand fitness classes.

Peloton (PTON stock) sign on city storefront
Source: JHVEPhoto / Shutterstock.com

PTON Stock: Service Outage Is Just One of Several Problems

Shortly after noon, Peloton posted on its website that “We are seeing widespread recovery of Peloton services.” While the cause of the outage was not disclosed, Peloton still has a lot more to worry about.

For starters, the company’s founder, John Foley, stepped down earlier this month as part of a restructuring effort. Former Spotify (NYSE:SPOT) and Netflix (NASDAQ:NFLX) executive Barry McCarthy will be taking his place.

Upon Foley’s departure, Peloton also cut its full-year guidance for fiscal year 2022. The company previously expected to report revenue between $4.4 billion and $4.8 billion. Now, that figure has shrunk to $3.7 billion to $3.8 billion. Furthermore, Peloton now expects to end the year with 3 million connected fitness subscribers, lower than previous estimates of 3.35 million to 3.45 million subscribers. The fitness company also announced this month that it would be laying off 20% of its workforce, or 2,800 employees. In a press release, Peloton added that:

“This restructuring program is the result of diligent planning to address key areas of the business and realign our operations so that we can execute against our growth opportunity with efficiency and discipline.”

FT Claims Peloton Sold Customers Damaged Bikes

However, the bad news doesn’t end there. A report from the Financial Times details how Peloton concealed rust and corrosive damage on bikes that were later sold to customers. The plan, called “Project Tinman,” was allegedly devised by company executives last September. This was when Peloton warehouse workers first noticed flaking paint on some exercise bikes manufactured overseas. When notified, executives reportedly gave warehouse workers instructions on how to treat the damaged bikes with a chemical solution called “rust converter.”

Several Peloton insiders were concerned with Project Tinman. The scheme demonstrated that Peloton was willing to cut corners in order to meet expectations. An anonymous insider told FT that:

“It was the single driving factor in my beginning stages of hatred for the company that I had spent the previous year and a half falling in love with.”

Can Barry McCarthy Fix Peloton?

The looming question still remains: Can McCarthy turn around Peloton? McCarthy pinpointed two problems that explain Peloton’s poor performance. First, he noted that the company has an inefficient cost structure. For example, Peloton recently announced plans to cancel production of a $400 million facility in Ohio. Throughout the past 3 years, Peloton has also spent $47.4 million to buy a Taiwanese manufacturer and $420 million to acquire Precor, a fitness equipment producer.

Second, McCarthy believes that Peloton’s management team misjudged the temporary boost in sales from the pandemic. As a result, Peloton has had to lower its 2022 sales guidance. In addition, McCarthy believes that the team got ahead of itself, and that Peloton should find new ways to scale efficiently.

On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


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