Why Peloton is both succeeding and flailing amid Tread recall

What the heck is happening at Peloton this week? Lots: A third-quarter earnings report, a product recall, “underperform” ratings from stock analysts, and a data breach. If you’re trying to catch up on all the news from the connected-fitness firm this week, we’ll break it down.

Why were Peloton treadmills recalled?

All you need to see is this video of a toddler getting pulled under one. The $4,300 Tread+ sits high off the ground with no safety guard on the back, leaving space for a pet or child’s head to get pulled under. The Consumer Product Safety Commission (CPSC) reported three dozen accidents and the death of a child who was, notably, 6 years old.

What did Peloton do?

Initially, it refused to do a recall. CEO John Foley sent a message to Peloton members saying that, “CPSC believes that we should stop selling or recall the Tread+. I want to assure you that we have no intention of doing so. . . . Remember, the Tread+ is not for children under 16, and children, pets, and objects need to be kept away.”

Don’t children and pets get into everything?


Then what did Peloton do?

It swiftly backpedaled. The company agreed to a recall and the CEO apologized, this week.

What else is happening?

A data breach, also reported this week, which the world has already forgotten about amid the other events. It’s fixed, though reports say Peloton possibly has not been fully transparent about it.

What’s the financial fallout from the recall?

Limited. Peloton is still primarily a cycle company, not a treadmill company, so this week Peloton predicted that the recall will lose the firm around $165 million in sales in the next quarter, which is under 20% of its projected sales. (The company will actually lose more from lack of upcoming treadmill sales than from recall costs.) Peloton stock dropped 15% on Wednesday, though it started to regain some ground on Thursday.

Is there any good news?

Yesterday Peloton announced great third-quarter earnings, beating expected revenues by 13%, at $1.26 billion, more than double last year’s 3Q haul. It’s about to launch in Australia, and will likely release a more affordable Tread (now delayed) this summer.

Why are analysts rating its stock “underperform”?

Success as a public company is a different hill to climb. Peloton’s market cap is $30 billion, but its annual revenues are only around $4 billion. Members initially buy a pricey exercise machine, but most monthly customers are paying either $12.99 or $39 per month to subscribe to exercise classes, which is pennies. Competition is also surging. Simeon Siegel, a managing director at BMO Capital Markets and a regular Peloton rider, spelled it out in an analysis this week: “One can argue that more of Peloton’s market value has been created by its marketing department than by its engineers or instructors. Recommend the bike, worried about the shares.”

Can you say the problem in plain-speak?

Would you buy a lemonade stand for $300 if it only pulls in $40 per year, with just 27 subscribed lemonade drinkers?

Remind me what’s so great about Peloton?

It solved sedentariness. Historically, very few home exercise machines have managed to facilitate customers exercising at home, regularly, on an ongoing basis, with enthusiasm. Peloton has cracked that nut, and currently has approximately 3 million fitness class subscribers, with low churn rates (under 1% per month for equipment owners).

Do you use Peloton?

Yep. Love it. It’s the only place where you can log in and hear instructor Jess King say gems like, “I want you to make love to your body, and your body to make love to your bike,” leading you to think, I don’t want either of those things to happen to me, which will distract you from another sweaty mile. See you in class.

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