Peloton Stock Tumbles After Production Halt Rumors – Should You Sell?

Mandatory Credit: Photo by Mark Lennihan/AP/Shutterstock (10424985g)The Peloton logo is displayed on the company's stationary bicycle, in New YorkFinancial Markets Wall Street Peloton IPO, New York, USA - 26 Sep 2019.
Mark Lennihan/AP/Shutterstock / Mark Lennihan/AP/Shutterstock

The situation for Peloton seems to be quickly spinning out of control. The company is trying to clear out rumors it was halting production and laying off employees “to provide some additional context.”

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Following reports earlier this week, Peloton co-founder and CEO John Foley said in a note to employees on January 20, that the company had experienced leaks of confidential information.

“The information the media has obtained is incomplete, out of context, and not reflective of Peloton’s strategy. It has saddened me to know you read these things without the clarity and context that you deserve. Before I go on, I want all of you to know that we have identified a leaker, and we are moving forward with the appropriate legal action. But moving forward, I want to take a moment to talk about some of the changes with you directly,” Foley said in the note posted on the company’s website.

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Shares of Peloton closed down 23.9% at $24.22 on January 20, wiping roughly $2.5 billion off of its market value, CNBC reported.

Foley said that the company is continuing to invest in its growth, but that it also needs to review its cost structure “to ensure we set ourselves up for continued success.”

He added that rumors it was halting all production of bikes and Treads are false.

“Notably, we’ve found ourselves in the middle of a once-in-a-hundred-year event with the COVID-19 pandemic, and what we anticipated would happen over the course of three years happened in months during 2020, and into 2021,” he said. “We feel good about right-sizing our production, and, as we evolve to more seasonal demand curves, we are resetting our production levels for sustainable growth.”

Peter Cohan, a senior lecturer at Babson College and author of “Goliath Strikes Back,” told GOBankingRates that he is concerned about the company’s cash situation.

“It burned through $639 million in free cash flow in the September ending quarter when it had only $924 million in cash and short-term investments.  It added over $1 billion in a November stock sale. But unless it can generate positive free cash flow, future stock sales will seriously dilute the stock,” he said.

“Meanwhile, insider sales of $500 million in stock before its plunge do not look good to the general public — even if they were part of a 10b5-1 plan,” Cohan added. “Traders with 9.9% short interest in the stock are going to do very well betting on more trouble ahead for Peloton. It needs a new CEO and due to Foley’s voting control of the company, that is not going to happen.”

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On Jan. 19, CNBC reported that Peloton executives and insiders sold nearly $500 million worth of their stock before its big decline, according to SEC filings and that much of the selling started when shares surged past $80 in the fall of 2020. The sales gained momentum in 2021 as the stock held above $100.

CNBC added that John Foley sold $119 million worth of stock starting in Nov. 2020, according to SmartInsider. Others included the president William Lynch and Hisao Kushi, co-founder and chief legal and culture officer.

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In a preliminary earnings report on Jan. 20, Foley said that the company was “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.”

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Peloton will report earnings on Feb. 8.

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.
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