Amazon Stock: Acquiring Peloton is a Bad Idea

The rumor mill is turning. According to at the Wall Street Journal, fitness company Peloton (PTON) – Get the Class A report from Peloton Interactive, Inc. could be in the crosshairs of some potential buyers. Most likely, according to the news source, is Amazon (AMZN) – Get the report from Amazon.com, Inc..

While there might be a few good reasons why Amazon’s acquisition of Peloton might make sense, I think the Seattle-based tech giant had better walk away from the deal. Below, I explain why.

Figure 1: Amazon Stock: Acquiring Peloton is a Bad Idea

(Learn more about Amazon Maven: Amazon Stock: Were the bears in a hurry?)

Amazon + Peloton: what happened?

It all started at the end of January. An active investor urged Peloton board to fire the CEO and put the company up for sale. The main reason can probably be best illustrated by the charts below: sharp drop in product usage and revenue since early 2021.

Peloton reacted to falling demand and waning interest in indoor workouts by reducing production of bikes and treadmills. Investors have not reacted well to the company’s deteriorating fundamentals or the management team’s remedy: PTON’s share price has fallen 85% from its peak in early 2021.

Figure 2: Peloton quarterly total revenue and connected fitness quarterly workouts.

Figure 2: Peloton’s Quarterly Total Revenue and Connected Quarterly Fitness Workouts.

Why Amazon should own Peloton

Truist Securities was one of most vocal research stores to defend a deal between Amazon and Peloton. According to analyst Youssef Squali, the cloud and e-commerce leader could benefit from boosting the attractiveness of its Prime service.

The idea is to add another reputable premium service like Peloton’s fitness subscription to the Prime. It could increase the number of Prime users and better justify the higher price of Amazon’s flagship program – it recently increased in the US to $140 per year, as announced on the company’s third quarter earnings day. .

Amazon could also benefit from expanding its consumer hardware portfolio. In addition to a full line of Alexa-enabled devices, the company recently spear its wearable brand Halo. Peloton could help Amazon gain traction in consumer health and fitness.

Why Amazon Should NOT Own Peloton

Certainly, there is reason to make the case for the marriage between Amazon and Peloton. But a deal would not be without a high cost, even after PTON’s market value collapsed in 2021-22.

Dan Ives from Wedbush believes that an acquisition of Peloton would cost between $12 billion and $15 billion. In the middle of that range, the Peloton deal could be as expensive as Amazon’s most expensive acquisition ever: Whole Foods, in 2017.

To be fair, Amazon is not a struggling company. It has a strong balance sheet and the ability to borrow at low interest rates. But consider the timing of this supposed acquisition.

Amazon has just left behind a “golden era” of home shopping that helped boost its e-commerce revenue in 2020 and early last year. Then a perfect storm hit: As digital sales began to slow from the height of the COVID-19 crisis, Amazon faced supply chain and inflation issues.

Rather than playing defense, Amazon has invested heavily in infrastructure, procurement and transportation to ensure it emerges a winner from this transition period. These efforts consumed a good chunk of Amazon’s money. Free cash flow over the past 12 months was negative $9.1 billion versus positive $31 billion in the same period last year.

During a time of massive investment in Amazon’s core business and given the headwinds in e-commerce, does it make sense for the Seattle-based company to focus on Peloton? I think investors might react badly to the strategic shift.

Then, of course, there is the matter of Peloton’s deteriorating business fundamentals. Stationary bikes were “all the rage” during the pandemic months. But usage has been down sharply for about a year.

I think for a high-growth, relatively low-margin company like Amazon, it doesn’t make sense to own a company like Peloton. This would likely only drag Amazon’s revenue trajectory and deteriorate its margin profile.

Twitter speaks

Our sister channel Apple Maven recently posted a Twitter poll: Which Big Tech company should bid for Peloton? Please feel free to comment below.

Is the price correct?

Examining a company’s trading fundamentals is only half the work of finding a good stock. The amount one pays to own the shares is a key factor in the success of any investment. This is why valuation analysis is so important.

Alpha Spread The user-friendly platform allows you to estimate the fair value of a stock – through valuation multiples, discounted cash flows, and more. I believe service is a must for anyone looking to own the right stock at the right price. Visit alphaspread.com and get started with a 7-day free trial.

(Disclaimer: This is not investment advice. The author may own one or more stocks mentioned in this report. Additionally, the article may contain affiliate links These partnerships do not influence editorial content. Thank you for supporting Apple Maven)

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