Selling Peloton to Apple for 10x

TLDR:

- Working 6 days in a 4 day work week.

- We’re flipping Peloton to Apple.

🧠 The Takeaways

Peloton is dead in the water and its leadership knows it. If we can get our hands on it and strip out the Subscription/Content biz, we have a shot at a great exit to Apple.

Peloton needs to go all in on Subscription. Period.

Peloton needs to find the next innovation curve on unique workout experiences.

They should be dumping every $$$ they have back into more content.

LBAB Community - 4-Day workweek fail.

I'm sure as a bunch of you remember, a couple of weeks ago, I talked about how I was gonna start doing the four day work week.

Well, it hasn't happened at all. It was way too ambitious of a change from 7 days/week -> 4. Instead of 7 day weeks.

I’m down to 6. So, I’ve gotten 1 day back. I'm no longer working Saturdays.

I find the time is similar to a mini-vacation, where the refresh helps me set up for a more successful week. But it’s a long path to go from 6 → 4 days.

The biggest change (and a legit huge win) in this process is I've stopped taking meetings on Mondays and Fridays: now all of my meetings are consolidated from 11 a.m. to 5 p.m. Tues - Thurs.

That’s allowed me to really focus on deep work and be more productive. Shout out to Drew Sanocki for his CEO weekly schedule tweets from a couple of months back.

I think that the 4-day week will work for other people, and the principles of restricting the amount of hours I work to focus on more valuable things has been helpful.

But starting a PE Biz and Media Biz (plus consulting + other projects) make 4 days impossible.

There's just too much to do for each project.

But I hope that everybody else is trying and experimenting with things that make them more productive. As always, hit reply, and let me know what you’re tinkering with.

I’m looking for the next optimization. Cutting calls down to 3 days is my biggest so far, but my goal is to increase efficiency by another 10-15% overall this year. Then maybe one day, I can go back to the 5-day work week.

And now let’s dissect potentially the worst turnaround of the 2020’s. Peloton.

Let’s Examine This Biz

Peloton is dead in the turnaround waters with with 0 sight at safe harbors.  Their “Turnaround CEO” is leaving in the middle of the “get fit” stage, while they’re hemorrhaging money.

Trading at $3.42/share with a $1.26B market cap, -86% since it’s Sep 2019 IPO. Rumors are spreading that PE is circling. Took ‘em long enough.

That COVID peakiest of peaks was $162/share. Then stimi checks ran out. To say the bottom fell out would be a comical understatement.

Even if you bought back in at its 2023 peak of $16.9/share, you’d still be down 81%.

Financial Summary

TLDR Analysis: Implosion Coming soon.

Efficiency (G&A, OPEX) is improving, but too little too late 😓

Cutting Marketing too aggressively. Sales are falling too fast. ⚰️

The bikes have a negative Gross Margin (-18%) 🤮🤮 

Cutting only goes so far. A biz still needs to grow to be profitable. Peloton is unwinding too many hard problems at the same time. Once you get out over your inventory skis, coming back is a high-wire act that requires everything to go right.

And for Peloton it isn’t.

Let’s Strip This Biz!

Here are my 3 steps to keep the Get-Fit-Train chugging and get us our yacht in Capri.

1) Go all in on Subscription

The biggest mistake Peloton ever made was manufacturing bikes. 

Peloton should have never tried to be Apple with a Connected Ecosystem.

They should have become Netflix = The DTC workout content biz.

If we look at the numbers, this becomes so obvious. 

Hardware (40% of Total ‘23 Rev): 

Sales: -48% YoY 

Gross Margins: -18% (Not YoY. Total! They lose 18% on every bike sale)

Software (60% of Total Rev):

Sales : +20% YoY

Gross Margins: 67% (Overall)

Now, which biz would you want to operate?

The negative Gross Margin biz with plummeting sales that’s the smallest biz unit

The larger, high Gross Margin, steadily growing biz.

The problem with their original strategy is Fitness isn’t a razor-razorblade model where you can lose money on the device and make it back up in subs. 

This was the “brilliant” big bet of the Silicon-Valley-inspired 2010s- eCom game. It failed miserably.

Takeaway: Get out of the Bike biz.

2) Re-invest in Unique Workout Experiences

Peloton’s genius startup insight was that consumers wanted the content of high intensity cycling of SoulCycle without going to SoulCycle.

The problem with focusing on Disruption is they went too far in their goal to take the market.

Peloton is truly a content biz, not a fitness device manufacturer. 

Consumers subscribe to Peloton for the instructor content, not because the bikes do anything special. Peloton thought they were competing with Bowflex. Really, they’re competing with Netflix.

They aren’t selling more bikes because any consumer can just lay their phone on any bike.

Fitness device bizs are similar to the “it” cooking device of the moment. There’s a boatload of cash to be made while the trend is hot (Instant Pots, Air Fryers), but once the trend moves on, you're stuck with too many expensive devices and a fire sale or bankruptcy.

Where Peloton should be investing is smaller, retro-fitted devices that make any workout equipment integrated with Peloton content. Peloton shouldn’t care what devices customers are working out with. They should care that they are working out to Peloton content.

The Peloton Guide seems to be the first step in exactly that direction. What essentially looks like the Xbox movement monitor from a decade ago is an AR workout that simulates a personal trainer at home.

This should have always been the focus. Basically Vizio’s cheap-TV-to-sell-you-ads model. Analyzing all that data to push more subscription sales is the key.

The Guide looks like it’s meant for free weight workouts. Apply the same concept for Yoga, Cycling, Running, Rowing…

That’s a biz we can get behind.

Takeaway: Everything funnels into feeding the Sub beast.

3) Invest more in content

They don’t break out in their earnings how much they invest in content. And regardless of the number I know it’s not enough because they have $522m sitting in inventory. 

We know they’re going to lose money on the inventory. If they had invested that $500m into content, how many more app subscribers could they have acquired, retained, upsold?

Would Peloton be in this problem if the COVID boom hadn’t pulled forward so much of their demand? Could they have more naturally grown into this and avoided this death spiral? I’ll leave that philosophical what-if for another day.

At this point, the last valuable asset Peloton has is its content library. The only way this biz survives is if they pivot away from selling devices (which is clearly not their area of expertise) and focus on Content.

Ironically, it’s very similar to Netflix’s decision back in the day to bet the farm on streaming and wound down the DVD biz.

Takeaway: Becoming THE Fitness content producers = Peloton’s only chance

Final Thought

Why am I saying we should strip out a hardware biz before selling to the most successful consumer hardware manufacturer in the world?

3 reasons:

Apple needs better content, not more devices

Peloton clearly can’t affordably make bikes

Subscription has so much more scalability to it. Apple already has the distribution.

1) Apple needs better Apple Fitness+ content.

Sorry to all the Apple fanbois, but Apple Fitness+ isn’t compelling. Who do you know actually uses it on a regular basis to power their workouts?

Right. That’s what I thought. 

The reason it isn’t compelling is because it’s content isn’t. When you sell something that’s built for everyone, it’s built for no one. Aka branding death.

And no offense to their instructors, but Who TF are Scott, Jenn, and Greg ? Those don’t seem like people we’d follow routinely.

Vs. Peloton instructors are beloved and have a cult following. The Instructors (*cough cough* INFLUENCERS) alone would make people want to join Apple Fitness+. And more importantly actually use it.

2) Peloton can’t make bikes at scale.

I won’t spend too much time here since I’ve already beaten up on Peloton, but they clearly can’t make bikes and money at the same time. They thought they made bikes that consumers wanted and could fall in love with.

Apple could turn this ship around, but will they want to with iPhone and iPad sales falling + the Vision Pro having disappointing sales? Peloton doesn’t have the runway to play that game.

3) Peloton’s Content is infinitely more scalable.

1 of the greatest challenges killing Peloton in their current biz model is every time they want to enter a new market (new type of workout), it’s either: 

Insanely expensive to produce new equipment to take the market (Tread, Row)

A market where devices are irrelevant (Yoga, Free weights)

To evolve from a fad -> trend in fitness, they need to prove that they can create content no matter what workout is in right now. They can miss the entire profit window of a new market because of the 18-36 mo hardware development cycle.

The other major reason why: Apple would love just the content. The Instructors spark more content for AppleTV+ (Apple’s real next market).

If you don’t think all the fans would watch a 30 min weekly series about their fitfluencer lives…the development team at Netflix has 19 spin offs of Drive to Survive to prove otherwise.

And let’s be honest. Peloton was basically just Bowflex with an iPad on it.

Let’s unburden a $1.67B content biz with 67% Gross Margins. We can flip it to Apple (without even growing it) for 10x topline and let them blow it out into a $50B/yr fitness biz.

Yea you read that right. The biz is trading below its Sub revenues.