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Will Peloton Become the Next M&A Target?

An activist investor expressed his views over the weekend that Peloton Interactive, Inc. (NASDAQ: PTON) should fire its Chief Executive Officer John Foley and evaluate the sale of the company, after the share price plummeted recently, according to CNBC.

Meanwhile, shares of New York-based exercise equipment gained over 3% during the pre-market trading session on January 24 on the news. However, shares of the company have lost over 80% in the past year, below its IPO price of $29 in September 2019.

Activist Investor Blackwells Views

On January 23, Blackwells accused John Foley, Peloton’s co-founder, Chairman, and CEO, of strategic missteps like inconsistent pricing and manufacturing strategies, which have led to a sharp decline in the company’s share price performance.

Blackwells Capital owns less than a 5% stake in Peloton, and believes that Peloton is an attractive acquisition target for potentially larger technology or fitness companies.

However, as of September 30, John Foley and other insiders have super-voting Class B shares, with over 80% control of Peloton’s voting power. This implies that any changes to be made at the company will require huge pressure from other shareholders.

Peloton: Why Share Price Loss?

During the COVID-19 pandemic, Peloton saw strong demand for its fitness classes and equipment, making it one of the most sought-after stocks with $50 billion in market capitalization near the end of 2020.

However, in 2021, the robust demand faltered as customers returned to the gym and opted for other fitness options, following a gradual ease in pandemic-related restrictions.

As a result, the company witnessed a slowdown in its revenues growth and declining profitability amid rising costs. Consequentially, the company announced a hiring freeze in November 2021 and started evaluating ways to control costs like optimizing its marketing spending and curbing showroom development.

Earlier, on January 18, CNBC reported that Peloton hired management consulting group McKinsey & Co to review its cost structure blaming historically high inflation levels and higher supply chain costs. According to the report, the company could possibly hike the bike prices by around 15%, potentially cut jobs, and consider store closures.

Notably, on January 20, shares of the company plunged almost 24% to $24.22, erasing $2.5 billion in market capitalization in a single day. The dip followed after CNBC reported that Peloton is temporarily halting production of its fitness bikes and treadmills to cut costs.

Responding to the reports, CEO Foley dismissed the news and released the preliminary second-quarter results. For Q2, the company expects total revenues of $1.14 billion, near the low end of the previously guided range of $1.1 billion to $1.2 billion.

In a company press release, CEO Foley stated, “As we discussed last quarter, we are taking significant corrective actions to improve our profitability outlook and optimize our costs across the company. This includes gross margin improvements, moving to a more variable cost structure, and identifying reductions in our operating expenses as we build a more focused Peloton moving forward.”

Wall Street’s Take

Following the turn of events last week, many of the Top Analysts have decreased their price target on Peloton.

On January 21, Evercore ISI analyst Shweta Khajuria decreased the price target on Peloton to $40 (4.8% upside potential) from $72, and reiterated a Hold rating.

Believing that Peloton shares may remain range-bound, Khajuria stated, “We continue to think PTON will likely face diminishing consumer demand (due to rising competition, reopening economies and mix-shift in consumer spend towards experiences), in addition to limited visibility with reduced backlogs, and the need to right-size its operations by optimizing its fixed and variable cost structure.”

The rest of the Wall Street community is cautiously optimistic about the stock, with a Moderate Buy consensus rating based on 13 Buys, 13 Holds and 2 Sells. At the time of writing, the average Peloton Interactive stock forecast was $52.17, which implies 92.8% upside potential to current levels.

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