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Peloton needs 'to show it can be stable' for a potential acquisition: Strategist

BMO Capital Markets Managing Director Simeon Siegel joins Yahoo Finance Live to discuss Peloton and how the company should position itself going forward.

Video transcript

SEANA SMITH: Peloton shares moving to the upside today, up just around 3 and 1/2% after announcing that it is cutting 500 more jobs, its fourth layoff announcement of the year. CEO Barry McCarthy telling the Wall Street Journal, quote, "We need to grow to get the business to a sustainable level."

Here to talk about what that level could potentially look like and the path forward for Peloton, we want to bring in Simeon Siegel, BMO Capital Markets managing director and senior analyst. Simeon, it's great to see you. So McCarthy out saying that these cuts are necessary to put the company in a better position. I guess, how do you see Peloton positioned right now? And is it in a position to return to growth?

SIMEON SIEGEL: Hey, yeah, great to see you. Great to be here. I think that we need to incorporate or internalize the fact that Peloton has a great brand. It has a great community. But that doesn't necessarily mean it has room for growth at this point. And so I think what we're seeing now is the turnaround is just that much more difficult. We're watching incremental cost cuts, unfortunately, which are impacting people's lives.

But it's also this decision to recognize that to get to profitability, the company needs to recalibrate. And so I think if we can focus on profitability, as opposed to growth, I think there's a story. I think every time the focus is on trying to get a new member, there's going to be another drag.

DAVE BRIGGS: And now their fourth round of layoffs leaves them about half the number of employees they had at their peak. The interesting report also says McCarthy gives them six months to turn this around. If you're a betting man, what kind of chances do you give Peloton to turn it around in six months?

SIMEON SIEGEL: Yeah, so fortunately, I'm not allowed to be a betting man right here. So we'll stick to the facts. So the facts that they say right now is an interesting point. So there were a few different articles out there today. One of them mentioned six months. One of them didn't. My understanding of the Peloton email that was sent out did not mention the six months. So but it's there. And that means we have to ask the question, what does that mean?

And so I think that there's been so much of a conversation surrounding the fact that Peloton went from here to here really quickly. And now it's somewhere in the middle or somewhere down here. All the question there is, what's the value? Is there an acquirer? And so I think the six-month conversation started raising the question again of, is there a point at which Peloton management says, you know what? Let's run a sale process. And that's, I think, the relevance and the interesting part of that six-month nuance comment that you bring up.

But we have to remember, even if the company decides they want to sell, it doesn't necessarily mean you have somebody who wants to buy. And I think we have to still ask the same question we've been asking since February of '22 when people first started talking about, are there acquirers? At the end of the day for a company that's watching its demand falter and its churn grow, does Peloton, now that the company is cheaper, look more attractive?

Or for these big tech companies that have been named as potential acquirers, wouldn't they have rather bought this company when it was on its way up when it was grabbing that mindshare? So I think that it's very interesting. And the comments today are very interesting, raising-- re-raising the question of, should M&A be on the table?

But I think we still have to figure out, just because they-- even if they decide they want to put it up for sale, which they have certainly said they're not, do they find someone who wants to pick the stock up or the company up, given where it has come down to?

SEANA SMITH: Well, Simeon, what do you think? Because you obviously follow the company so closely. You've been an analyst, tracking Peloton's every move now for quite some time. Do you think a sale is likely to be on the table at some point?

SIMEON SIEGEL: Yeah, I think that it is hard unless-- and I can obviously be wrong when it comes to this. But I think that at the end of the day, Peloton, as an entity, we published a report noting that the downside, we see, can be at $5.

And the thought process there is, you have 3 million subscribers that become 2 million because the churn goes up and because the people that bought during COVID aren't necessarily your best customers. So if you were-- and again, I'm not saying they will. But if you were to lose 1/3 of your base at the current price, you can still justify a $5 stock. We have to internalize that still, right? We're still in the billions of market cap as we think about what that means.

So, for a company to come in and buy, you have to figure out what they're getting. And right now, what you're getting is an ongoing bleed of your members, as opposed to a growth of your members. So I think what the company needs to do is convince themselves and the outside world, whether they sell themselves or not, that they can find a bottom, that they can stabilize, that they can say we've got very strong, loyal brand-- loyal-- people that are willing to pay a recurring $44 a month and maybe even more.

But the question is, what is that number? We don't know that yet. And I think every dollar that's spent trying to get someone new, rather than committed to focus on maintaining the people that are already involved, I think is a dollar that's probably not that well spent. I think that's what we're seeing.

And so I think, is there a value where Peloton is worth? Yeah, I don't-- I'm not in the camp that Peloton is zero-- far from it. I think Peloton offers something very compelling and makes people very happy. But we need to figure out what that level is. And that's, I think, the question that's going on right now.

DAVE BRIGGS: And the companies you often read about, of course, the usual suspects-- Apple, Amazon, with more cash than most countries, and then of course, Netflix may be on the undercard. Does any of those make sense?

SIMEON SIEGEL: So, again, way out of my pay grade, but I think it's fair to ask the question of, is Peloton in trouble more attractive to one of those companies at a billion, 2 billion, 3 billion, 4 billion, versus Peloton doing really well at 10 to 15 billion because the companies you just mentioned are very large companies with very large market caps. And so would they rather-- is that incremental $10 billion.

I know this sounds absurd, but is the incremental $10 billion to catch a falling knife more attractive than if they would have wanted it on the way up? I just-- I think right now, we're talking about this as a distressed asset. And the companies you just mentioned are looking for growth vectors. They're not looking to try and get something on the cheap, unless they believe it's stable.

So that's why I think the company-- I think for their standalone or for an acquisition, they need to show they can be stable because until then, you have to ask that question of, what does an Apple really get at this point that they couldn't have gotten better off last year when they thought the trajectory was just going up and to the right?

SEANA SMITH: Simeon, what do you think it's going to take for Peloton's turnaround effort to really start to resonate with investors?

SIMEON SIEGEL: Yeah, I think that's an excellent question. And I think it's all about perspective and where we start from. I think if we internalize what the company did, they went from 0 to several billion dollars. That is a tremendous achievement in a very short amount of time. The problem is in between them, they went to $50 billion.

And so, at the end of the day, it's hard to argue that it's not resonating with investors. It's just not resonating with the investors the way it did over the last few years. And that's been effectively the reason we've had the sell rating. But I do think right now, it is still-- it's valued at a very large business. A lot of the companies that went public later than they did, a lot of the companies that are younger than they did have watched up and downs as well.

So I think for them to get people back on board, people need to be able to create the bottom. I know I've said it a few times. And it's this idea that once you can create the stable, once you can create the trough, you can start building back up and figure out where you're going to go. But people need to figure out, is Peloton a growth story, or are they just a very nice business? And then there's nothing wrong with being a very nice business. But that gets me to that $5 of earnings, which is still much lower than where we are right now-- or sorry, $5 a share price.

So that's, I think, this element of figuring out the identity. Every time we hear about another ongoing cut, it makes people think, well, maybe I'm not at the bottom yet. Maybe I don't know where we are. And I think that's the next shoe to drop. We have to find out what the churn starts looking like over the next year. So I think there's still a lot of questions.

DAVE BRIGGS: Indeed there are. Simeon Siegel answered a lot of them for us from BMO. Appreciate that. Good stuff.