The new rumor circulating Wall Street in the past couple of business days has been a potential acquisition of fitness company Peloton (PTON) – Get Peloton Interactive, Inc. Class A Report. Allegedly planning a bid for the assets would be e-commerce giant Amazon – but Apple (AAPL) – Get Apple Inc. Report could be in the race as well.
Could Peloton be a good addition to the Cupertino company’s portfolio of consumer products and services? The Apple Maven discusses the possibility, along with the potential impact to Apple stock and its investors.
Figure 1: Apple Stock: Why A Peloton Deal Would Not Make Sense
Photo Illustration by Dom Amatore for The Wall Street Journal; Photo: Zwift
(Read more from the Apple Maven: New iPhone and iPad: Buy Apple Stock Ahead Of The Event?)
Peloton + Apple: what happened?
Peloton, a stock that declined a staggering 85% between the late 2020 peak and the end of January 2022, has been rebounding strongly. Up 20% for the day as I write this sentence, the company could be acquired by Amazon or one of its peers, according to the Wall Street Journal.
Figure 2: PTON share price on 02/07/22.
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A few analysts and media channels were quick to assess whether the deal might make more sense for Apple instead. Wedbush’s Dan Ives thinks that the Peloton deal would complement Cupertino’s company’s health strategy that is at the core of the Watch and Fitness + initiatives, for example.
He further argues that the acquisition, which could close at between $ 12 billion and $ 15 billion, would be easy for Apple to digest. The company has around $ 200 billion in cash and strong cash flow to support the transaction.
Does the deal make sense?
I agree with Dan Ives’ points above. Yes, Peloton could be highly complementary to Apple’s health push. Also, a deal priced at $ 15 billion or less would most likely not hurt the company’s balance sheet much. I would even add an argument or two in favor of the acquisition.
First, the Peloton brand seems compatible with Apple’s own: highly regarded, aspirational and compelling to a consumer group that is less price sensitive. Second, Peloton could help boost growth in Apple’s subscription-based services, something that the Cupertino firm seems to care about. Peloton’s connected fitness subs have been growing steadily (see below).
Figure 3: Peloton’s connected fitness subscriptions.
Peloton’s earnings release
That said, I also have enough reasons to be against the deal. Among them are the following:
- Even though Apple has plenty of cash at the bank, the company expects to be net-cash neutral (that is, gross cash will equal debt) in the foreseeable future. Cash spent on M&A is cash that Apple will not return to shareholders via buybacks or dividends.
- Apple is not known for diverting resources to large acquisitions. Beats Electronics was an outlier, bought for $ 3 billion in 2014. All others cost Apple $ 600 million or less. The company, therefore, is not an expert at integrating large organizations into its own.
- One of the strongest cases for investing in Apple are the company’s rich margins. Peloton, on the other hand, reported gross margin of less than 33% in fiscal Q1 (vs. Apple’s 42% in the same period) and sizable net loss of $ 376 million. Unless Apple could gain economies of scale fast, Peloton would eat into Apple’s margins and earnings.
- Lastly, there is a substantial risk that Peloton’s best days may have been left behind – more specifically during the lockdown and stay-at-home period of the COVID-19 crisis. Peloton’s revenues and number of workouts have been declining progressively since early 2021 (see below), something that probably contributed to an activist investor having recently asked for the firing of the CEO.
Figure 4: Peloton’s quarterly total revenue and connected fitness quarterly workouts.
Peloton’s earnings release
My final take on PTON deal
I understand why some might see Peloton as a good fit for Apple. But in the end, I don’t think that a deal would make sense for the Cupertino company and its investors.
Instead, I believe that Apple should continue down its current growth path. The iPhone is in the middle of a strong 5G cycle, and the Mac seems to have benefited from the introduction of the M1 family of chips. Longer term, Apple has plenty of opportunities to explore in mixed reality products, the metaverse and autonomous vehicles.
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Which of the following Big Tech companies would benefit the most from acquiring Peloton, worth around $ 10 billion today?
Is the price right?
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Apple Maven)
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