Can Peloton’s share price recover from the Tread+ tragedy?

Peloton’s [PTON] share price has had a rough few weeks. A tragedy which called into question the safety of their Tread and Tread+ equipment, and the company’s delayed response to the issue, have seen Peloton’s share price dive in recent sessions.

On top of this, cybersecurity issues have seen digital users’ personal information leaked. So, can Peloton’s share price get back on the road, or is it an uphill struggle from here on in?

 

Why Peloton’s share price is tanking

In March, Peloton’s CEO disclosed that a child had died in an accident involving the Tread+. In April, the US Product and Safety Commission said people should stop using the product around children and small pets. Peloton then went on the defensive, saying the warnings were misleading and inaccurate. The company said that the instructions state the Tread+ should be kept away from children and pets, and that the treadmill featured a safety key.

  

Given the tragedy of the situation, Peloton’s response that people should read the instructions was found wanting. Now it has been forced to recall all 126,000 Tread+ and 1050 of the cheaper Tread machines, stopping any further sales.

“The decision to recall both products was the right thing to do for Peloton’s Members and their families. I want to be clear, Peloton made a mistake in our initial response to the Consumer Product Safety Commission’s request that we recall the Tread+. We should have engaged more productively with them from the outset. For that, I apologize. Today’s announcement reflects our recognition that, by working closely with the CPSC, we can increase safety awareness for our Members,” said CEO John Foley.

While it's tempting to say that Peloton’s share price tanking is indicative of the wider tech selloff — it’s down 40.06% so far in 2021 (as of 10 May’s close) — the avoidable PR disaster is clearly having an impact on the stock. Peloton’s share price tanked circa 16% following Foley’s statement.

  

The fitness company is also under fire on the cybersecurity front — or rather, the lack of it. Back in January, security researcher Jan Masters found that he — or anyone else on the internet for that matter — could make authenticated requests to Peloton’s API to access user information, according to TechCrunch. Masters reported the leak to Peloton on 20 January, offering a 90-day window to fix the problem. Instead of fixing the bug, Peloton limited access to its API to members, meaning anyone with a monthly membership could still hack the API.

 

Can Peloton’s share price recover?

Peloton’s share price saw unprecedented gains as a result of stay-at-home orders triggered by the coronavirus. People stuck at home brought the firm’s bikes and treadmills, with Peloton unable to keep up with demand.

However, there’s no bigger issue than child safety, and there is no press release or short-term fix that is going to make things right.

John Foley has acknowledged Peloton will have to take some “short-term pain” before it can rebuild trust in the brand. The decision to recall its treadmills will cost Peloton at least $165m, as it ceases taking new orders, cancels existing orders and waives subscription fees.

Along with the CEO’s apology, Peloton will also shortly release a software update that will lock the treadmill’s belt when not in use. 

However, any negative financial effects from the incident will not be seen immediately. Instead, last week Peloton posted third-quarter results that showed continued growth in its business.

  

Peloton’s earnings were $1.26bn in the three months to the end of March, a 141% jump from the same period last year. Connected Fitness Members grew 135% to over 2.08 million and paid digital subscribers grew 404% to 891,000. Net loss came in at $8.6m, a big improvement on the $55.6m in the same quarter the previous year. Adjusted EBITDA was $63.2m.

One statistic to keep an eye on next quarter will be average monthly churn. Peloton boasted that the metric “meaningfully outperformed expectations and was the lowest level in six years” in the third quarter at 0.32%. Next quarter will be a true test of how loyal subscribers really are.

“It’s not only how you respond in the moment, but what you do afterwards that’s crucial. It’s always good to be proactive in how you handle a situation – the worst thing you can do is not do anything,” Karen Freberg, associate professor of strategic communication at University of Louisville, told The Drum.

Freberg suggests that Peloton’s instructors, who she describes as “the face of the brand”, could help rebuild trust with a formerly very loyal user base. Freberg — who is a Peloton user herself — believes that the company can overcome the current crisis, but that “actions speak louder than words.”

If Peloton’s share price is to recover, those actions need to come sooner rather than later.