Peloton Interactive (NASDAQ: PTON) is still trying to figure out what it wants to be when it grows up. It tried making exercise equipment, but that didn't work as well as hoped. Now, it is trying to be a subscription exercise service, which doesn't appear to be working out as well as hoped, either.
That said, the company's recent debt restructuring has managed to buy some time for management to keep working on the business. The only problem is that this vital move will just make it harder for the company to turn a sustainable profit.
A little backstory about Peloton
For better or worse, Peloton got off to a very bright start, hitting the market with its high-end, connected exercise equipment at an auspicious time. Well, a good time for Peloton, anyway. It was a pretty ugly time for the world, given that people were being asked to socially distance to slow the spread of the coronavirus. With businesses effectively shut down, people were spending more time at home and were unable to go to the gym.
Image source: Getty Images.
Peloton's exercise bikes quickly became the must-have product for keeping in shape. And, to be fair, there were a lot of things to like about Peloton's product. Being connected allowed a similar feel to being in the gym, with live sessions experienced through a screen on the equipment. And the software the company provides allows riders to basically replay previous sessions and compete as if it were live. If you had to work out at home even though you preferred going to a gym, a Peloton was a desirable middle ground.
There are a couple of problems here, though. For starters, exercise equipment isn't revolutionary in any way. The business has been around for a long time, and competition quickly came in with similar, and cheaper, alternatives. And, as the world got used to living with COVID, people just started going back to the gym. That effectively turned an expensive exercise bike into little more than a clothing rack for many people.
Peloton tried to pivot, leaning into its subscription service, which it tried to sell on a stand-alone basis. Given that the costs of creating content can be spread over a large number of subscribers, potentially creating large profit margins, this seems like a good idea. But it hasn't worked out nearly as well as hoped.
While subscriptions tied to its fitness equipment have remained strong, and even grown slightly over time, the non-equipment subscription base peaked in fiscal 2022 and has been trending lower. At the end of the fiscal third quarter of 2024, the non-equipment subscriber base had fallen over 30% from its high-water mark.
Peloton is a troubled company
All in, Peloton is losing money, and there's no clear sign that this is likely to change anytime soon. That has resulted in the company's stock falling dramatically from the early days of its existence when investors were riding the Peloton fad.
One big headwind the company was facing was the 2026 maturity of a convertible bond it had outstanding. The total coming due was close to $1 billion, which Peloton simply doesn't have. So it needed to refinance that note, effectively pushing the due date out and kicking the can down the road. Through a series of moves it has done just that, which is a net positive because it buys the company more time to figure out its business model.
But there's a big problem here. The original convertible notes were issued back when investors thought Peloton was going to take over the world. And interest rates were much lower, too. The 2026 convertible bonds had an interest rate of 0%. That's not a typo. Peloton was playing with free money because investors thought the business would grow so much that the profits from converting the bonds into shares would more than make up for the 0% interest rate.
That clearly wasn't the outcome. And interest rates are much higher today,. Part of the refinancing was to issue new convertible debt with an interest rate of 5.5%. The principal is lower, at around $350 million, but that doesn't change the fact that Peloton now has to pay interest, which it didn't have to do before. So while Peloton bought itself time, there is a cost associated with this move that will make it that much harder for the company to go from red ink to black ink.
A mixed blessing
It was important for Peloton to deal with the debt cliff it faced, so it is hard to suggest that the refinancing was a bad thing. But it is also hard to suggest that it was purely a good thing, either, given the need to start paying interest, increasing the costs the money-losing company faces.
Peloton remains a very risky investment that only the most aggressive investors should be considering. Yes, it bought more time. But the goal of turning a sustainable profit is now going to be even harder to achieve.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Peloton Interactive. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
