Consensual Hallucination was so much fun while it lasted.
By Wolf Richter for WOLF STREET.
Peloton Interactive – which sells internet-connected stationary bicycles, treadmills, and indoor rowers along with subscriptions on the idea that it would lose money on the equipment and make it back on the subscriptions – reported another massive loss this morning of $242 million for its fiscal Q4, ended June 30, and of $1.26 billion for the fiscal year 2023. How can a company lose $1.26 billion on $2.8 billion in revenues?
It has lost money every single year since its IPO in September 2019. In its 2022 fiscal year, it lost $2.83 billion. How can a company lose $2.83 billion on $3.56 billion in revenues? I mean, I know how. But I’m just shaking my head. It lost a total of $4.6 billion in the five years as a public company.
The company has long been a hero in my pantheon of Imploded Stocks. This morning, the shares kathoomphed another 23% to a new record low of $5.38 at the moment, down by 97% from the get-rich-quick peak in January 2021 of $167, at which point it had a market cap of $49 billion. Of that, over $47 billion have since then evaporated. And the shares are down by 81% from the IPO price of $29. But today’s big 23% dive is so minuscule against the Grand Collapse since January 2021 that you can barely see it on the chart (data via YCharts):
Peloton has been steeped in all kinds of more or less horrible messes, recalls, legal settlements, fines, product issues, manufacturing issues, CEO and CFO departures, etc., including that its equipment led to the death of a six-year-old.
Among the messes it disclosed today was that the costs of the recall in May of its original Peloton Bike “substantially exceeded our initial expectations,” and it added that “about 15,000 to 20,000 impacted members opted to pause their subscriptions” — the sacred all-important subscriptions! — in its fiscal Q4 “while they waited for the replacement part.”
Another mess it reported was that its revenues fell by 5.4% for the quarter to $642 million; and by 22% for the fiscal year, to $2.8 billion. “The slowdown exceeded our expectations through May and through the first three weeks of June as consumer spending shifted toward travel and experiences,” the company said today.
This was the second year in a row of revenue declines. The peak year had been fiscal 2021 with $4.0 billion in revenues. Since then, annual revenues have plunged by 30%.
I mean, how could revenues plunge by 30% over two years, after the company blew $4.6 billion in order to buy revenue growth? Do you see what kind of mess this is?
That you can make exercise equipment and lose this much money is itself hilarious. It’s even more hilarious that investors funded these losses enthusiastically in order to subsidize our struggling consumers. It’s always great to see altruistic investors, LOL.
It’s hilarious that, despite the losses all along, investors poured money into the company during the free-money era that the Fed instigated and that had turned investor brains to mush. After the cash that pre-IPO investors had poured in, the company raised another $1.2 billion during the IPO, plus another $1.1 billion in a follow-on stock sale in November 2021, even as executives had dumped their shares at peak prices.
It was all part of what I call Consensual Hallucination. They wanted to invest in Peloton to get rich quick, hoping that losses wouldn’t matter because money was free, that Peloton could just buy some growth with these billions of dollars, and tout its homemade metrics of growth, and that this growth in its homemade metrics would be enough to drive up the shares and allow investors to get rich quick by selling this stuff to a greater fool at an even higher price.
And some did, including executives that sold a ton of shares at bubble prices, including $496 million in shares in late 2020 through 2021, before the big plunge, when shares traded in the range between $80 and $166. Some of the executives that got rich quick are now gone, including the CEO and CFO, but they got to keep their wealth.
Others, as the stock chart above shows, didn’t. There are always lots of greater fools around that are all too happy to pick up the tab and allow executives and other stock jockeys to get rich quick.
The company has burned about $400 million in cash over the past 12 months, and had $814 million in cash left as of June 30, giving it some runway before it runs out of cash. If it can’t raise more cash, or if it can’t get pretty soon to a state of being at least somewhat cash-flow positive, at some point, it’s just over.
The thing is, a company cannot buy revenue growth forever unless investors whose brains have turned to mush keep funding it. But the era of free money has ended. And higher costs of capital cures mushy brains. So maybe Peloton can just continue to shrink its way to becoming more or less cashflow neutral, and hang in there for years as a penny stock. That would be my optimistic scenario.
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