Peloton’s turmoil could be appealing

This is an audio transcript of the FT News Briefing podcast episode: Peloton’s turmoil could be appealing

Marc Filippino
Good morning from the Financial Times. Today is Thursday, February 10th, and this is your FT News Briefing.

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Investors are fleeing biotech stocks and leaving biotech companies starved for cash. A little TLC, that’s tender loving care, turned Fidelity’s passive investing business into a global giant. Plus, Peloton has ridden some big ups and big downs, and that could make the company an attractive acquisition target.

Andrew Edgecliffe-Johnson
Even those people who are bearish about Peloton’s individual prospects as a company are pretty bullish on the category, on this connected fitness idea.

Marc Filippino
I’m Marc Filippino, and here’s the news you need to start your day.

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Investors have been bailing out of biotech stocks recently. And now dozens of biotech companies are running low on cash and they’re struggling to raise fresh funds. Here’s the FT’s global pharmaceutical correspondent Hannah Kuchler with more.

Hannah Kuchler
So one investment partner said to me there’s been a complete bloodbath across the board in biotech in the last few weeks. Yeah, strong language. And that’s because a lot of investors are seeking safer havens, and perhaps they also misunderstood what it is to invest in biotech. It’s not like investing in a software company, right, where software can generate revenue fairly quickly. Actually, it takes a really long time to discover a drug. Some of these companies went public before they’d ever even put a drug into humans. We know that clinical trials can take several years. And so they haven’t had any data that makes them think, oh, this is definitely going to work. And so they’re impatient and they think, maybe we should go back to go back home, go back to our safer havens.

Marc Filippino
So what does that mean for companies, Hanna? Are they going to be OK?

Hannah Kuchler
It puts them in a really tricky spot, you know, because there are some companies that need a lot of cash. A lot of biotech companies suck up cash to go through these trial processes, and they’re running dangerously low and they thought they could tap the market again. It’s really common in the sector to have secondary offerings, and that doesn’t look that likely at the moment. So they might have to turn to alternative finance providers to be or they might get picked up by Big Pharma, which has a lot of cash sitting on its balance sheet and frankly, has been whining for a long time that valuations are way too high. So now maybe they’ve got that wish and they’ll actually go shopping.

Marc Filippino
Hannah Kuchler is the FT’s global pharmaceutical correspondent.

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Fidelity’s former CEO, Ned Johnson, once expressed scepticism over whether index funds would ever take off. Fortunately for Fidelity, its current CEO, Ned’s daughter Abigail, saw things a little differently. The passive investment business she revamped has become one of the biggest money managers in the world. Here’s our global finance correspondent Robin Wigglesworth.

Robbin Wigglesworth
I think Abby Johnson realised that Fidelity, to survive and thrive in the industry today, it needed to be what some people they arbitrarily call a supermarket. They have to be able to sell everything to all the customers because they have, you know, pension plan members, healthcare plans and ordinary investors. So she shook up this passive arm, which kind of hums around in the background called Geode. And it’s just a manufacturing. It’s like a factory that creates and manages index funds on behalf of Fidelity. So if you buy an exchange traded fund or an index fund from Fidelity, you might not know it, but it’s actually managed by Geode.

Marc Filippino
Right, so Geode. I want to talk a little bit more about that, Robin. How did Geode Capital Management grow so quickly over the past few years? I mean, it surged to a trillion dollars last year.

Robbin Wigglesworth
Well, part of it is Abby Johnson just giving it a bit of TLC, it’s actually. A few years ago, they changed the name of the index funds produced by Geode from Spartan, which was the brand they were sold under before. And that wasn’t actually that well known, and they were kind of expensive. And under Abby Johnson, they changed the name to market them as Fidelity Funds and slashed fees to the absolute bone, like going straight head-to-head up against Vanguard and others on price. So they just decided we are going to be competitive in this business. And they did this at a time when there were a lot of tailwinds behind index funds and passive investing broadly. That has just helped Geode explode in size.

Marc Filippino
Robin Wigglesworth is the FT’s global finance correspondent.

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The connected fitness company Peloton had a wild ride up during the pandemic and then a really bumpy ride down. And this week, the company finally slammed on the brakes. It replaced co-founder John Foley as CEO, pulled the plug on a new factory, fired a fifth of its workforce and cut up to a billion dollars in revenue from this year’s forecasts. The share price has surged about 50 per cent since Monday, and all this turmoil is feeding speculation that Peloton could be an attractive takeover target. Here’s the FT’s US business editor Andrew Edgecliffe-Johnson.

Andrew Edgecliffe-Johnson
Peloton has an unusually engaged and committed user base. I don’t think the word engagement quite really captures the passion that a lot of Peloton users feel for not just about their bike but about the people on the screen on that bike. So Peloton has built a very unusual connected fitness platform, which has been copied by other people. But it’s got a scale now, not least among the investor community and the kind of creative community that tends to form opinions that’s made its kind of the brand for connected fitness in a lot of people’s eyes.

Marc Filippino
So who’s thinking about buying the company, Edge?

Andrew Edgecliffe-Johnson
So we have established through our own reporting at the FT that both Nike and Amazon are kicking the tires of Peloton, whether that translates into a bid. A lot of investors theorise that Apple would be another potential bidder. Or Facebook. One activist investor that’s putting a lot of pressure on Peloton at the moment called Blackwells Capital with a stake of less than 5 per cent of the company has pulled together a very long list, including the likes of Berkshire Hathaway and Sony, which I think most people feel are more left field ideas. But it is certainly true that a lot of companies are very, very interested in this trend of connected fitness. And even those people who are bearish about Peloton’s individual prospects as a company are pretty bullish on the category, on this connected fitness idea, which seems to have grown through the pandemic and to be sustaining even as gyms reopen. And when we don’t have to be stuck in our living rooms on our bikes.

Marc Filippino
So Edge, what could a company that wants to acquire Peloton do with it?

Andrew Edgecliffe-Johnson
Well, we won’t know until we see whether a bid even comes forward. But essentially the theory behind an acquisition would be that Peloton has struggled to interpret demand for its product. First in 2020, when everybody was suddenly stuck at home, couldn’t go to the gym, they were all furiously ordering Pelotons, and Peloton, the company, couldn’t make enough of these bikes and tracks to keep up. Then suddenly, they have too many bikes and treadmills, so the number one theory behind selling Peloton to a larger company would be a larger company could kind of weather those ups and downs.

Marc Filippino
So Edge, John Foley may have stepped aside as CEO, but you know, he’s still executive chair of Peloton. What role would he play in a potential deal?

Andrew Edgecliffe-Johnson
The question of whether a sale is possible really comes down to John Foley because he and a few other directors and early shareholders have super voting shares, which give them 20 times the voting power of ordinary shareholders. So essentially, no deal is possible unless they decide that they want to do it. And I think if they do decide that it’s time to sell, that will suggest that they’re taking a more bearish view of how long it would take Peloton to get back on track.

Marc Filippino
Andrew Edgecliffe-Johnson is the FT’s US business editor. Before we go, Wall Street has lost its appetite for restaurant stocks. They’re nervous about rising food, labour and energy costs. But one chain is still enticing investors. Customers have kept buying Chipotle’s burritos and, you know, the extra guac on the side despite higher prices. Sales in the last quarter of 2021 beat expectations. They rose to nearly $2bn. Chipotle is so confident that it’s got more price rises in the works, and it’s even opening 7,000 new restaurants in North America.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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