Call me crazy but I’m feeling some sympathy for Barry McCarthy, who has been the new C.E.O. of Peloton since February 9. He’s got a brutal assignment ahead of him: turning around the fortunes of the once high-flying exercise equipment company with the hyped-up mission to use “technology and design to connect the world through fitness” and “empowering people to be the best version of themselves anywhere, anytime.” Let’s face it, that’s a tall order during the best of circumstances, let alone the one McCarthy inherited. Peloton, which was once worth more than $50 billion during the height of the workout-from-home-forever depths of the pandemic, is now worth around $9 billion. Its stock is down 83 percent from its all-time high on Christmas Eve 2020. In 2021, Peloton was the worst performing stock in the Nasdaq 300 Index.
But McCarthy gives a lot of us aging Liberal Arts majors some hope. First, he’s 68 years old and came out of “retirement,” as he puts it, to take on the assignment, after leaving his position as C.F.O. of Spotify in January 2020, right before the pandemic. McCarthy hasn’t only been hanging out in the Presidio, playing golf, though. He’s also been an “executive advisor” to Technology Crossover Ventures, the 27-year-old uber-successful venture-capital firm with early-stage investments in Airbnb, Facebook, Spotify (which was probably why McCarthy was the C.F.O. there for nearly five years after serving on the board of directors), Netflix (where McCarthy was C.F.O. for nearly 12 years until December 2010), LinkedIn, Expedia and, quelle surprise, Peloton, which is probably why he is now the C.E.O. According to the New York Times, he says he told TCV, “Hey, Coach, put me in. I can fix this.”
I can relate to McCarthy, at least when it comes to the Liberal Arts-to-Wall Street road less traveled. Like him, I was a history major. He went to Williams, I went to Duke. Like him, I went to business school. He went to Wharton. I went to Columbia. Like him, I was an investment banker. He lasted eight years at Credit Suisse First Boston. I lasted seventeen years, at a combination of GE Capital, Lazard, Merrill Lynch and JPMorganChase. McCarthy spent two years as a management consultant after Wharton, at Booz Allen, something I did not do. After Wall Street, our paths diverged. He served as the C.F.O. of one company after another and as a board member to a variety of other companies, including Pandora, Eventbrite, Rent the Runway and Wealthfront. I returned to writing and journalism.
But we both agree on the importance of a well-rounded Liberal Arts education. He wrote that his education at Williams was the “difference-maker” for him. (I think my two sons would agree; they are proud Williams grads, too.) He has written that while he couldn’t have become the C.F.O. of Netflix without his Wharton M.B.A., it was his study of history, at Williams, that made him a success at Netflix. (He was the C.F.O. when Netflix went public and the stock increased nearly 2,000 percent before he left in December 2010, some nine months before his boss, Reed Hastings, decided, briefly and foolishly, to split the company in two.) He explained that studying history taught him “how to think, how to write, how to reason deductively, and how to advocate and defend my point of view.” He credited Russ Bostert, the chair of the Williams history department, with teaching him that “knowledge is what you remember after you forget what you learned.” Nice.
Netflix, he explained, is a data-driven company. (That’s for sure.) But it was never enough for him to simply absorb the data that was being endlessly generated. “I have to be able to decide (correctly) what’s important and what to ignore and I have to decide what the data means and what to do in response to it, and I have to be able to present my analysis and defend it much like a history major has to interpret historical events and the key milestones which led to some unforeseen outcome,” he continued.
One need look no further than the last three C.E.O.s of Goldman Sachs to realize the value that a Liberal Arts education has, not only in social interactions but also in the professional marketplace. Hank Paulson was an English major at Dartmouth. After serving as Goldman’s C.E.O. for seven years, he then served as the Treasury Secretary during a period of time that included the 2008 financial crisis. Lloyd Blankfein, Paulson’s successor, was a history major at Harvard. He can recite, by heart, any number of theme songs from 1970s TV shows. Blankfein’s successor, David Solomon, the current Goldman C.E.O., was a government major at Hamilton College. You’ve got to believe that if Goldman Sachs is choosing Liberal Arts majors as its C.E.O.s, then that education must be considered pretty valuable.
So how does McCarthy turn this battleship around? First, of course, he has to serve his former colleagues at TCV, which remains one of Peloton’s largest shareholders, according to the company’s 2021 proxy, and is second only to John Foley, the company’s founder and former C.E.O., in voting power. Foley controls 39.6 percent of the Peloton votes; TCV controls 37.5 percent of the votes.
TCV also bought more shares in Peloton’s November 2021 equity offering two weeks after its C.F.O. told Wall Street research analysts that the company didn’t need more money. “Cutting to the chase,” she said, “we don’t see the need for any additional capital raise based on our current outlook.” Oops. How quickly that outlook changed. That offering, for more than $1 billion, was priced at $46 a share. Peloton’s stock is now around $26 a share, down 45 percent from the offering. Ouch. Anyway, with a path to ball control, and their man in charge, it’s looking increasingly like TCV’s company now, not Foley’s.
McCarthy will need somehow to figure out how to soothe the pain of the investors who bought stock at $46 a share. He’ll also need to put a salve on the wounds of those investors who bought Peloton stock anywhere between where it languishes today, at around $26, and its high of $162 per share. He’ll need to restore confidence in the company’s manufacturing processes after the Financial Times revealed, in February, that in September 2021, Peloton employees decided to sell bikes that had been manufactured in Taiwan (for prices ranging from $1,500 to $2,500 each) even though the employees had detected rust on the non-visible part of the brand-new exercise equipment. Instead of returning the machines to the manufacturer, the company started something called “Project Tinman” to “conceal the corrosion,” according to the FT, and sell them anyway. “It was the single driving factor in my beginning stages of hatred for the company that I had spent the previous year and a half falling in love with,” one employee told the FT about “Project Tinman.”
In his first television interview as C.E.O., with CNBC’s Jim Cramer last week, McCarthy was, of course, upbeat about Peloton’s prospects. Like Foley before him, McCarthy is getting paid $1 million a year and received 8 million stock options, with a strike price of around $38 per share, which incentivizes him to boost the company’s stock price however he can, presumably through the typical combinations of cost-cutting, layoffs, and other “efficiencies,” that a founder, such as Foley, eschewed. In his chat with Cramer, McCarthy acknowledged that both investors and customers had lost confidence in the company. “Until we can prove that we’re capable of forecasting the performance of the business and meeting those forecasts to expectations, then there will continue to be some uncertainty in the business,” he told Cramer. “Having said that, from where I sit today—given what I know and there’s still quite a bit I have to learn about the business—it looks to me like we’re pretty well capitalized for the challenge ahead.”
McCarthy also told CNBC that he intended to lower the price of the Peloton bikes in order to attract a larger audience to the company’s products, and then to make up for the lower revenue from selling the machines by, he seemed to imply, increasing the price on the monthly subscriptions to the instructors and to the network of other Peloton enthusiasts. He figures the market places a higher valuation on recurring revenue and lifetime value, and if the stock prices of the major streaming companies are any indication, he is correct.
But we shall see how much of the streaming pixie dust, if any, falls on Peloton. The social network aspect of the Peloton experience was always part of Foley’s pitch to investors, perhaps to a fault, and McCarthy is doubling down on that. “If it’s just NordicTrack,” he told the Times, “you’re not winning. The magic happens on the screen. That’s where the user experience is, right? It’s the music. It’s the instructors. It’s all the social aspects that we have only just begun to develop—and that’s where we’re going to spend our money.”
Another thing he reiterated he would not do—in addition to not raising the price on the machines—is to sell the company. Before his appointment, speculation was rife that the board would sell Peloton after activist investor Blackwells Capital acquired a large stake, trashed Foley in 65-page PowerPoint, and pushed for a sale. Blackwells mentioned the usual tech behemoths as possible acquirers, including Apple, Google, Amazon, and Nike—some 19 possible buyers in all, including ViacomCBS (now Paramount Global), of all things. But that chatter has died down and McCarthy seems determined to run the company, not sell it, and said that was why he decided to take the job. That, too, is probably why some considerable air has come out of the stock since he took over. In fact, the Peloton stock is down 32.6 percent since McCarthy became C.E.O. on February 9. So Blackwells got one out of its two demands.
What’s clear is that McCarthy, the history major, needs to craft a new narrative for Peloton if it’s to have any chance of pulling out of its tail-spin. It may not be valued at a ridiculous $50 billion anymore, but its $9 billion valuation still looks mighty high for a company that is going to have to be operated, not sold. Let’s be generous for a moment and use Peloton’s own “Adjusted EBITDA” numbers and see where we get. (I hate “Adjusted EBITDA” with a passion and investors should force companies to dispense with the concept, but that’s a rant for another day.)
For the 12 months ending December 2021, Peloton’s Adjusted EBITDA was a negative $129 million. If we instead use Peloton’s less charitable net income for the last 12 months—the number that is approved by GAAP, or generally accepted accounting principles—then we’re talking about a net loss of nearly $700 million. So, ya know, either way these numbers make the company’s $9 billion valuation look like theater of the absurd.
Will Peloton go the way of GoPro, once a Peloton-like high-flier that is now valued at $1.3 billion, down 90 percent from the all-time high it reached in 2014? Or will it be priced like a competitor, Life Fitness, which was sold in 2019 to a private equity firm for $490 million? Another competitor, IFIT Health & Fitness, which owns the aforementioned NordicTrack, among other fitness equipment products, shelved its planned I.P.O. last October, which isn’t all that surprising since it was shooting for a valuation of $6 billion based on a net loss for the year ending May 2021 of $517 million. (Nota bene, its “Adjusted EBITDA” for that year was still negative $15 million.) What seems certain, sorry to say, is that McCarthy is unlikely to perform an Apple-like turnaround at Peloton, as Steve Jobs did when he returned to Apple after his NeXT/Pixar sabbatical. Turnarounds are difficult in any business, but they are nearly impossible in the tech/consumer products sector, where business evolutions happen at warp speed.
So is it the junk-heap of history or resurrection for Peloton? This is not investment advice, but until McCarthy figures out a way to fix the company’s inventory problems, its morale among its employees, its reputation among its customers and its investors, and its ability to make genuine EBITDA, not fake EBITDA, then I’m thinking graveyard, or perhaps a bottom-dollar sale to the likes of Google, which bought Fitbit, another fallen angel, for $2.1 billion in 2021. Its stock had dropped 90 percent before Alphabet, Google’s parent company, scraped it off the basement floor.
