Peloton Backpedals In Right Direction

Peloton Interactive built its business to delight its customers. Now it must do the same for its shareholders.

Peloton said Tuesday that it will stop producing its own hardware, exiting all owned manufacturing operations and expanding its relationship with its Taiwanese manufacturer, Rexon Industrial Corp. The move comes as Peloton’s new Chief Executive Barry McCarthy works to right the company’s financials, unwinding big, and in hindsight naive, bets co-founder John Foley made during his tenure.

Peloton’s shares, which have lost 92% of their value over the past year, jumped by almost 5% after the market’s open. A shift to outsourced manufacturing came as a relief. The about-face highlights what Mr. Foley got spectacularly wrong: Peloton acquired Taiwan-based manufacturer Tonic Fitness Technology back in 2019—a move Mr. Foley said was meant to help Peloton own the supply chain in an effort to increase scale and capacity, as well as to “delight” its members.

But, as online retailer Stitch Fix, another business currently undergoing major restructuring and suffering a similar stock price implosion also is learning, it is very hard to own every piece of your customers’ experience and grow exponentially without losing your investors. The numbers simply don’t add up.

Customers probably won’t care where their exercise bike is made, and in fact Rexon and other contract manufacturers had already been building some of Peloton’s components and equipment. Apple, a company with a reputation for design and a loyal customer base, outsources its manufacturing, largely to China. That wasn’t always the case, but outsourcing went a long way toward making the company highly profitable, courtesy of current Chief Executive Tim Cook. In Peloton’s case, it is worth noting that Rexon builds the company’s Tread treadmill and built its recalled Tread+, the sales of which are still on hold. As long as there are no more recalls, Peloton users are there for the company’s content, with the pretty hardware just a means to the end.

Mr. Foley wanted Wall Street to see Peloton as a growth company, and that is how it was valued at its peak. Ultimately, though, there are only going to be so many people interested in sweating profusely on an expensive stationary bike alongside kindred endorphin seekers the world over. As BMO analyst Simeon Siegel put it, Peloton is a company with a phenomenal stable of existing users and right now, it should be focused on “bear hugging” those loyalists.

Data from UBS show that adoption levels of Peloton’s cheaper app, which the company views as a key customer acquisition tool toward its more expensive subscription, continued to decline in May and early June. It also showed active users declining since January. YipitData shows subscriber retention for fiscal 2022 has slightly underperformed historical averages and that churn increased in June year over year. More broadly, Similarweb data shows “home fitness” web traffic declining 24% year over year for the most recently tracked two-week period in late June—the largest annual declines logged by the firm this year.

Wall Street will have to wait for Peloton’s fiscal fourth-quarter report for more granular details on how exactly Tuesday’s announcement will impact the company’s cost structure. A Peloton spokesperson confirmed the company would cut about 570 employees in Taiwan, but that 100 employees would remain in that business unit focused on quality control, engineering and research and development. And Peloton will get a new chief financial officer in Liz Coddington—previously of Amazon.com and Netflix—after the company said Jill Woodworth, who had served in that role since 2018, will step down.

The company we once knew as aspirational is quickly becoming a commodity. It will try to prove to its investors that it can at least be a hot one.

As the war against Hamas dragged into 2024, there were worries here that investment would dry up in Israel’s globally important technology sector, as much of the world became angry against the casualties in Gaza and recoiled at the unstable security situation.

In fact, a new survey found investment into Israeli technology startups grew 28% last year to $10.6 billion. The influx buoyed Israel’s economy and helped it maintain a war footing on several battlefronts.

The increase marks a turnaround for Israeli startups, which had experienced a decline in investments in 2023 to $8.3 billion, a drop blamed in part on an effort to overhaul the country’s judicial system and the initial shock of the Hamas-led Oct. 7, 2023 attack.

Tech investment in Israel remains depressed from years past. It is still just a third of the almost $30 billion in private investments raised in 2021, a peak after which Israel followed the U.S. into a funding market downturn.

Any increase in Israeli technology investment defied expectations though. The sector is responsible for 20% of Israel’s gross domestic product and about 10% of employment. It contributed directly to 2.2% of GDP growth in the first three quarters of the year, according to Startup Nation Central—without which Israel would have been on a negative growth trend, it said.

“If you asked me a year before if I expected those numbers, I wouldn’t have,” said Avi Hasson, head of Startup Nation Central, the Tel Aviv-based nonprofit that tracks tech investments and released the investment survey.

Israel’s tech sector is among the world’s largest technology hubs, especially for startups. It has remained one of the most stable parts of the Israeli economy during the 15-month long war, which has taxed the economy and slashed expectations for growth to a mere 0.5% in 2024.

Industry investors and analysts say the war stifled what could have been even stronger growth. The survey didn’t break out how much of 2024’s investment came from foreign sources and local funders.

“We have an extremely innovative and dynamic high tech sector which is still holding on,” said Karnit Flug, a former governor of the Bank of Israel and now a senior fellow at the Jerusalem-based Israel Democracy Institute, a think tank. “It has recovered somewhat since the start of the war, but not as much as one would hope.”

At the war’s outset, tens of thousands of Israel’s nearly 400,000 tech employees were called into reserve service and companies scrambled to realign operations as rockets from Gaza and Lebanon pounded the country. Even as operations normalized, foreign airlines overwhelmingly cut service to Israel, spooking investors and making it harder for Israelis to reach their customers abroad.

An explosion in negative global sentiment toward Israel introduced a new form of risk in doing business with Israeli companies. Global ratings firms lowered Israel’s credit rating over uncertainty caused by the war.

Israel’s government flooded money into the economy to stabilize it shortly after war broke out in October 2023. That expansionary fiscal policy, economists say, stemmed what was an initial economic contraction in the war’s first quarter and helped Israel regain its footing, but is now resulting in expected tax increases to foot the bill.

The 2024 boost was led by investments into Israeli cybersecurity companies, which captured about 40% of all private capital raised, despite representing only 7% of Israeli tech companies. Many of Israel’s tech workers have served in advanced military-technology units, where they can gain experience building products. Israeli tech products are sometimes tested on the battlefield. These factors have led to its cybersecurity companies being dominant in the global market, industry experts said.

The number of Israeli defense-tech companies active throughout 2024 doubled, although they contributed to a much smaller percentage of the overall growth in investments. This included some startups which pivoted to the area amid a surge in global demand spurred by the war in Ukraine and at home in Israel. Funding raised by Israeli defense-tech companies grew to $165 million in 2024, from $19 million the previous year.

“The fact that things are literally battlefield proven, and both the understanding of the customer as well as the ability to put it into use and to accelerate the progress of those technologies, is something that is unique to Israel,” said Hasson.

Peloton Backpedals In Right Direction

Fitness company says it will outsource its manufacturing as it steers toward more sustainable growth.

The 28% increase buoyed the country as it battled on several fronts but investment remains down from 2021