Connected fitness ‘is in its infancy' and Peloton is no longer the only option: Strategist

BMO Managing Director Simeon Siegel joins Yahoo Finance Live to discuss Peloton stock and outlook for the fitness industry in 2022.

Video Transcript

JULIE HYMAN: Peloton. We've been watching that stock. It's still up by 5% here this morning after falling 24% yesterday. Still trading below the IPO price of $29 a share. And according to our next guest, it could go a little lower from here. That's Simeon Siegel of BMO Capital Markets. Simeon, you have been a bear on this stock. We've talked to you many times about it. And you got more bearish today. You cut your price target to $24. You're the only underperform of this company on the Street. What would change your mind, if anything? Like, what could Peloton possibly do to turn things around at this point?

SIMEON SIEGEL: Hey, guys. Great to see you. So what's weird, right, what's odd is, if you think about it, we all normally talk about shrink to grow, right? When we're talking about Victoria's Secret, Under Armour, like, all the conversations that the three of us normally have center around taking a company that's cutting costs and is doing a turnaround. I don't think anyone thought we would be having that conversation about Peloton.

We're talking about a company that's supposed to be in uber growth mode that now probably are making the right decisions, right, focusing on selling less and charging more, bringing in consultants to cut costs. But the problem is where the company is right now, I think we still need to recalibrate what it is we're actually talking about. And it's not to say that I won't come back and have our Victoria's Secret conversation where the brand is clearly not dead, but it's being undervalued. But I still think the numbers need to be meaningfully reset. And what I'm sure we'll get into, I don't think it's going to be as easy to cut costs as they think.

BRIAN SOZZI: Simeon, why has there been-- why haven't any heads rolled at Peloton on the executive team?

SIMEON SIEGEL: Above my pay grade. I-- listen, I think that if you ask me the question of how much of this is self-inflicted versus not, I think we watched the supply-demand mismanage a supply-demand imbalance flip. I think at the beginning of the pandemic, there wasn't enough product to meet supply. And now-- or to meet demand, and now vice versa.

And I think that's because there was a decision made internally to spend a lot, build up the inventory balance, and that obviously is proving the incorrect decision. So I think that's how I'll answer that beyond that. Again, that's beyond my scope. And again, at the end of the day, we're still talking about people, so I want to be cognizant of that.

BRIAN SOZZI: The stock has really fallen off a cliff. I mean, you've been all over it since day one. Are we at that point now where we might see some activist attention start to kick the tires on Peloton?

SIMEON SIEGEL: So you can. The thing to keep in mind, though, is there's a big insider ownership. So it's hard to just take a large position with insider voting rights. And then also, we're still around a $10 billion company. Like, let's be clear about something. Like, at the end of the day, the market cap here-- I know we're all looking at the stock price versus where it IPOed. We also have to keep in mind that there's a lot more shares than the IPO. So it's not as simple as that. It still is a very large valued company. And it's still being valued on EV to sales.

Normally, we think about sales as being a big growth metric. I think when we think about what is the reason Peloton loses money, a huge part of that is because cost of acquisition is high. And Sozz, you and I talk about all the competitors. I mean, Tonal, Hydro. There's just a whole host of brand new other people vying for mindshare here that is not going to make that get any cheaper.

So if we want to focus on if we want to believe there is growth ahead and it's not just a reset with no growth, a lot of those costs are inherently variable. And unless they're going to stop spending on research and development and stop spending on sales and marketing, you have to find another place to do that.

JULIE HYMAN: Simeon, where are those customers going to come from? And related to that question, where did the customers go, right? I mean, I think even if the argument is they made supply missteps, right, clearly, there is also a demand problem, too. Has Peloton hit the ceiling for the bikes themselves?

SIMEON SIEGEL: Yeah, Julie, I think it's a great question. I think that throughout this, a huge part of our bear thesis had been predicated on the notion that it was a great growing company, but we always thought it was a pull forward of demand, not an expansion of demand. And I think we're seeing that. To their absolute credit, they have over 2 and 1/2 million members, right? So this idea of we have a big base that right now is far ahead of the competition, that's there. And they'll have to make sure that that maintains. They'll protect that, make sure that churn doesn't go up.

But so I don't know that we've lost. I know that theoretically, there's been a kind of-- Peloton is seeing a huge falloff. But we are absolutely seeing new entrants. We are seeing that connected fitness. I think connected fitness is in its infancy. I think that this is a great category with a lot of really compelling options that are emerging now.

And so I think you're watching these new competitors take that mindshare and start letting consumers know that this notion of working out at home is great. Technology allows it to be a special experience. Content allows it to be fun. But there's more than one option. And I think that's going to continue growing. That's not going to shrink.

BRIAN SOZZI: And Simeon, CEO John Foley coming out with a note yesterday evening, noting there was a leaker inside the company. Now the company is taking action against this leaker. But to hear a leaker inside of Peloton, this is not normal things you hear. You think that is indicative of a cultural issue inside the company.

SIMEON SIEGEL: Yeah, Brian, I think you're exactly right. I think the main thing to focus on is the company acknowledging that there is a leaker. I think we've seen a stream of news flow come across in the last week, so clearly, that was happening. And you have to ask why. And you have to ask, we've seen different conversations around morale, but listen, not for nothing. A lot of-- Peloton is a big-- they compensate their employees through share-based comp in a pretty meaningful way.

I mean, we can see what they spent on stock-based comp in the last three years, and it's a big number. Anyone who got a strike price, anyone who was paid over the last few years, likely got options priced much higher than where they are right now. So you're watching a whole slew of things happen. And you're also looking at what you thought was a much bigger bank account. And you're probably asking a lot of questions.

And I think, to your point, we need to ask and we need to focus on the fact that if that's what it's looking like internally, what does that mean for the go-forward, right? And I think the problem we keep hearing about, there's this conversation about layoffs that keep coming up, which is very unfortunate. But if someone's sitting there and they're hearing that, how incentive-- how incentivized are they to keep on working right now in the interim?

So there's a halt on some version, right? They're saying it's not-- they're not halting all production. So there's some form of a halt. And then you wonder what's happening internally from the people that are still working. So I think that there's a lot of those inside questions that need to be asked.

JULIE HYMAN: You were just saying, Simeon, connected fitness is in its infancy. If Peloton's not going to win, or certainly, it's not going to be the only winner, even if it is going to do well, who's the winner right now? I mean, Peloton is the only one that's sort of the pure play that you can trade publicly, right? But where else should people be looking if they're looking for early ideas?

SIMEON SIEGEL: So, listen, Peloton is a winner. Like, I know I'm a bear. I know that that's kind of been the conversation. But I also think about them as being-- like, I want to give them all the credit that they own. I mean, the marketing department at Peloton is probably the best marketing department I've ever seen. And Peloton will-- there's no reason to think that they are not. As long as liquidity doesn't become a concern, there's no reason to think they won't still be a winner. But I think it's exactly the point. I think there's going to be multiple winners.

And so you are right. I mean, there are some SPACs that are available with connected fitness products. There's equipment manufacturers that are there. But a lot of the ones you're talking about are still up and coming. A lot of the ones that will likely become the winners are still private. So I obviously can't opine on that. And that is what it is. But I think we are seeing it's not hard to find increasing and new connected fitness that are focusing more on technology than they're focusing on simply the content.

And I think that's going to probably be the next phase. I think as we see companies that give you something that have a moat, that give you something that does something new, that will probably be better for engagement. That'll probably be a long path. But again, I don't think-- I'm not trying to say to anyone that Peloton has not done a phenomenal job getting to 2 and 1/2 million members. I mean, they are currently the leader. They will continue to be a winner in this growth. Figuring out what that does to the stock price is another question. And I think that story went a lot further than the numbers.

JULIE HYMAN: So, super, super quickly, Simeon, when you look at ways to invest in this, companies you do cover, is it going to be Mirror, for example? Is that-- I mean, is that one of the other possibilities or no?

SIMEON SIEGEL: So I hear the question. I think the way-- the winners here I think are still private. I think, like, that's-- like, we don't-- I think right now, there's-- the connected fitness space still in the public sphere is not very large.

JULIE HYMAN: All right. Simeon, thank you so much. And obviously, Simeon has been prescient on this call on Peloton. So it's great to get your perspective on all of this. Simeon Siegel, BMO managing director, be well. Have a great weekend.