Peloton stock falls after death scene in 'Sex and the City' reboot

Simeon Siegel, managing director of BMO Capital Markets, discusses Peloton stocks down after a character in a 'Sex and the City' reboot died on a Peloton and why Lululemon shares dropped after Q2 earnings.

Video Transcript

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JULIE HYMAN: Are you a "Sex and the City" fan? Do you not like spoilers? If so, you're going to have to mute for a little bit in this next segment. If you don't want to hear what I'm about to say, I'm giving you plenty of warning. OK, the "Sex and the City" reboot series, the limited series, is out. And Mr. Big dies in the first episode. Not only does he die, he dies after taking a 45-minute ride on a Peloton. That made the stock fall by 11% yesterday. It is still falling today.

Simeon Siegel is with us now, BMO managing director. He covers Peloton. And you have been negative on this company before this happened. I don't think anybody would have expected this would have happened, except for the people who were making this show. I mean, but what does the fact that we saw such a reaction to this say about this company and this stock, Simeon?

SIMEON SIEGEL: Guys, we've had a lot of fun topics, and we've talked a lot about random things. Never in my life did I think I'd be commenting on Sex in the City, so there's that. I think-- listen, I think that more than anything, the question is, we've talked about Peloton's marketing team as being one of the best in the business-- in any business. I mean, they are so good at throwing a story, both to the consumer and to investors. And the question now is they just lost a little bit of the narrative.

So does this showcase we're at a different point in their life cycle where the Peloton story is now owned by the public? And that comes with a lot of risks. Because-- I'm not going to pretend like I actually saw the episode. But my understanding, it was a phenomenal product placement up until the end. So it's this interesting moment here where you have to ask, where is Peloton in its life cycle? Where does it go from here? And what does it mean that other people can co-op the message?

BRIAN SOZZI: Simeon, I'm not even looking out that far yet because I see this episode, I see the tweets out there, what's happening on social media. And my first thought, and I'm sure many are thinking, too, are, you get on a Peloton Bike, and you are at risk of falling over dead on your face. Do you think sales are falling, as we speak right now, for these products?

SIMEON SIEGEL: So, listen, I think it's easy to sensationalize. And are there people that are asking that question? I guess there must be. Do I think that there are many people that are thinking like that? Probably not. Again, we'll see.

I think, obviously, there's an unfortunate parallel that gets drawn, a very unfortunate parallel that can be drawn to real life situations that have nothing to do with this episode and nothing to do with Mr. Big having a heart attack that probably trigger some other PR conversations that need to be had. But I don't know. I don't know that people are saying if someone really wanted a bike, they're saying they shouldn't do it. Or if they're getting on their bike, they're saying they're now concerned.

Their response, which we should talk about, was interesting. I mean, if it was a joke, it was great. If it wasn't, it's a little confusing. But they basically joined in and explained why that fictional character was actually probably healthier and may have lasted this long because of his Peloton in the first place. So I think there's interesting conversations going around. I don't know that we're seeing a massive sales fall-off because of this event.

BRIAN CHEUNG: Hey, Simeon, Brian Cheung here. And apparently, the company didn't even know when they provided the bike to the show that that was what they were planning on doing with the script. But I guess that's a side point. Can we just zoom out a little bit, though, and talk about the precipitous fall that we've seen in Peloton stock year to date, right? The stock's down over 70%.

Even though you have a $45 price target, that would still represent a pretty sharp drop from where we were at the beginning of 2021. I guess maybe a natural question is, was it unfair for everyone to characterize Peloton itself as the reopening trade and the reflation trade that everyone was using to pour money into this stock? And would you say that now people have a more clear reading, especially stock investors, of exactly what the business model is?

SIMEON SIEGEL: Yeah, hey, Brian, a lot of really good points in there. And I think that even your first point shouldn't be glossed over. The fact that they knew the product was being placed, but didn't know what the plot line was going to be is really important, showing control of narrative. So I wouldn't gloss over that. I think it's a really good point you bring up.

The second point I think is critical, right? We've talked about connected fitness. We've all-- I've spoken with you guys about the different things that are on my hand right now in terms of whether it's an Aura or a Whoop. Like, there's-- the notion of what connected fitness and where we go from here is just in its infancy. I think what we're finding now is Peloton is not synonymous with connected fitness, that there's other players, there's other stories.

And I think that there's a little bit of a question now where people see this and say, OK, is this done, right? Did we just go back to the Jane Fonda movies where people have fitness at home and then it died? And I don't think that's the case at all. I think there's really interesting companies out there. We've talked about different ones. I think you guys have had different ones on the show, whether they're Tonal or Hydro. There's a lot of different companies that are making their mark and taking mindshare and market share.

And I think that this is a Peloton conversation, rather than as a connected fitness conversation. And it's interesting because it follows up Lulu slashing their revenues on Mirror. So I think what we're finding is that it's going to be a question of who's doing this product, who's finding a way to engage with the consumer and kind of maintain that growth, but not falling prey to COVID as being the right run rate, right?

We talked about on the show last time that I actually would hypothesize that the pandemic was bad for Peloton because I think the pandemic gave a false read. It made people too excited, it made the company too excited. And they ended up placing very heavy investments that now left them with much less cash at the same time that it actually brought a profile to the space. So it dwindled their cash and helped build the cash of their competition. So whether it's COVID, whether it's not, like, this should have a long trajectory, a long story. But it needs to be more than thematic. It needs to be company specific. Execution will matter, and maintaining that engagement will matter.

JULIE HYMAN: And Simeon, I know we do want to talk about Mirror in just a second, but one more question about Peloton because one of your peers over at Credit Suisse cut the stock this morning. And it didn't seem to have to do with the "Sex and the City" situation, but rather, more what you're talking about. People are going back to the gym, that maybe the case here was overstated. So what does normal for Peloton look like? And what is a price, then, that is appropriate for a normal Peloton?

SIMEON SIEGEL: Yeah, so listen, it's a great question. And Julie, I don't know if you mean the price for the bike or price for the stock and kind of the reference to [INAUDIBLE]--

JULIE HYMAN: The stock.

SIMEON SIEGEL: Yeah, so the 40 is interesting. The $45 price target that I've had or that I have has been there for a year. So when we looked at this, we said in a period where people are looking at sales multiples, when they're thinking about Netflix at 10 times, that's essentially what brought us down to 45 when the stock was much higher. It's very fair to ask now, as you get this mixed execution, 10 times revs, or 8 to 9, 10 times revs, or however you want to think about it, is hardly a floor on valuation support.

So on the one hand, we have dwindling demand. On the other hand, we also have to have this valuation recalibration. And I don't-- I can't speak for Credit Suisse. I don't know what the rationale was. But I think what people are going to have to say is, this is still-- in our note that we put out today, we try not to only talk about "Sex and the City." It was also some numbers. And Peloton was still, before today, a $15 billion market cap, right? I mean, that's a lot. So even being down 75%, it's still a very, very large company.

So I think that when we think about that, there's still room to recalibrate down. And like Sozzi and I talk about all the time, I love the product, right? I mean, they've done a great job. But the question of bridging the valuation gap where fundamentals completely detach from the stock, that's happening right now. And I think that's because it's no longer viewed, to Brian's earlier point, as this pandemic stock. Now it's actually being viewed as a company. And I think that's really important.

BRIAN SOZZI: Simeon, let's go back to Lululemon and Mirror. And I'll say this, you don't have to. Lululemon really got bamboozled, spending $500 million really at the height at-home fitness market for Mirror. It looks really like a very bad acquisition. My question to you is would it make sense for them to just shut Mirror down, save those costs, and plow it back into the core business?

SIMEON SIEGEL: So that's what friends are for. You do the dirty talk for me and throw that out there. But then lay me up to then say, so now should they spin it out? So I think at the end of the day, the question becomes, what can they do with this? What's the goal? Is it a marketing vehicle? There's a very interesting parallel, which I think you and I talked about the day that it was acquired, to Under Armour. Under Armour, big, big business. Came across, tried to stretch their audience size years ago.

And one of the many things that the way they did that, they bought a unit that they called Connected Fitness before connected fitness was a thing. Obviously, the past year, they ended up selling a lot of that at a price that was less than what was expected. So the fact that they're already cutting this has that reverberate-- it rhymes with Under Armour and connected fitness. What they end up doing with it, it's still a beautiful machine that sits in the store. And do they need to sell it? What will they get for it?

There's a lot of questions there in terms of the dynamic there. I think the one thing we do know is exactly what you just said. It's not doing what they wanted it to do. They just cut the revenue guidance in half. And I think what that leads to is this delineation. Like, when we talk about connected fitness versus specific companies, I think the next big thing we're going to have to understand is, connected fitness is two separate business models. It's equipment sales and it's subscription sales. And we've all known that, but we haven't priced it accordingly.

For Lulu to say that subs are up, their subscribers are up 40%, but they're cutting the revenue 50%, is the same thing that Peloton went from growing 100% to actually seeing revenues decline on an organic basis, potentially, if you exclude Precor, because the equipment sales were these one-time purchases. So I think that's going to be this evolution of the way we think about these concepts and think about what do you actually get from one of these acquisitions. And what you want is you want subs. The equipment is a way you get there.

JULIE HYMAN: And so what is the sort of TAM of connected fitness then, right? As we-- you think through this, I mean, it's funny you mentioned Jane Fonda. Like, back in the day, all you needed was a cute leotard and, like, some-- from VHS tapes, right? So maybe that's effectively what we need, just the 2021 version, which is some cute Lulu pants and your subscription.

SIMEON SIEGEL: So let's remember, you can get access to Peloton's content for $13 a month.

JULIE HYMAN: Oh, I know. I actually have that.

SIMEON SIEGEL: So why that? Listen, I'm not going to pretend to be a media analyst, but I anecdotally spend probably more on my cut the cord version of cable than I do because now I'm all a la carte with apps. Why can't it be similar? Right? Why can't the TAM be some version of everyone?

Because what's the TAM for e-commerce, right? It's anyone that plays in online once. So is there a way of saying there are certain pieces, certain companies that will get you with their equipment. There are certain companies that will get you with their content. And you might have a mix and match. And by the way, it might bring you into a gym as well.

I think it's important to remember that 15 years ago or whenever it was, e-commerce came along and everyone thought stores were going to be dead, and yet e-commerce is less than 20% of total retail. Like, fitness is going to be omni the same way that retail is, the same way that e-commerce is. And what that means is you're going to have to be special.

So all things equal, I'd rather be transported to an aisle. But if the only thing you're giving me is convenience and price, well, I can get better convenience in my living room and price online. Same thing with gym, same thing with fitness. So I think the TAM is colossal. The question is what aspects people can capture and what that engagement ultimately looks like.

JULIE HYMAN: I think somebody needs to come out with some retro leotards, is my takeaway from all of that as well. Simeon Siegel, BMO managing director. Great to see you, Simeon, and have a great weekend. Thanks for being with us.