Peloton provides a glimpse of the Fed's road ahead: Morning Brief
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Friday, August 26, 2022
Today's newsletter is by Myles Udland, senior markets editor at Yahoo Finance. Follow him on Twitter @MylesUdland and on LinkedIn.
Federal Reserve Chair Jerome Powell will make his biggest speech of the year in just a few hours.
Investors have spent the last few weeks of summer in the U.S. wondering whether the Fed chair will tease a larger or smaller interest rate hike at the central bank's next meeting. Some Fed watchers argue this speech is bigger than that sort of "birdies and bogeys" outline of near-term policy shifts.
But the reason the Fed is the focal point of so many financial markets conversations is because of what happens to those on the fringes of their influence.
Like all great dramatic leads, the Fed's power comes as much from what they do as it does from who is forced to react to the environment they shape.
Take Peloton (PTON).
The connected fitness company reported a disappointing quarter on Thursday morning. Shares fell 18% in response.
Where the company stands in its journey is clear — CEO Barry McCarthy used the word "restructuring" four times in his letter to shareholders.
Peloton expects revenues will decline again in the current quarter. And as McCarthy said in both his shareholder letter and a call with analysts Thursday morning, the company needs not only to cut costs, but also needs to get back to growing its revenues.
In his letter to shareholders, McCarthy compared Peloton to a cargo ship trying to reverse course at high speed. "We’ve sounded the alarm for general quarters," McCarthy wrote. "Everyone’s at their station. We continue to add new inputs to evolve our go to market strategy to restore growth."
As many investors will remember, however, it wasn't always this way for Peloton.
In the halcyon days of the pandemic-era stock market boom, the company was worth $48 billion. As of Thursday's close, its market cap stood at $3.7 billion.
At its peak, Peloton was seen as a transformative disrupter in the world of fitness undergoing a digital transformation seen in hundreds of industries.
Today, Peloton is a transformative disrupter in the world of fitness undergoing a digital transformation seen in hundreds of industries.
What happened between then and now can be described in either several books' worth of explanation or a few simple sentences.
The global economy began to resume old habits as the pandemic waned. Homebound workers returned to the office. Money that could not be spent on dining out and traveling was again spent on dining out and traveling. Supply chain logjams followed. Inflation began to accelerate. The world's habits, in short, moved away from the conditions that made Peloton's business explode in 2020.
When the Federal Reserve began raising interest rates in March of this year to instill some discipline in financial markets as inflation pressures rose, investors had already begun imposing their own discipline on companies like Peloton.
Fast-growing, cash-burning companies that investors loved when money was cheap and the world remained in transition during late '20 and early '21 fell out of favor as the cost of capital went up and a version of the pre-pandemic world began to take its shape.
Peloton shares dropped from the mid-$110s in late summer 2021 to $33 by the start of 2022. A nearly $50 billion company in January 2021 was worth closer to $10 billion a year later. This loss of value has continued.
The fundamental challenges at Peloton are plain to see, and have been plainly described by McCarthy in recent months. A tech industry veteran who came out of retirement to lead Peloton, McCarthy told Yahoo Finance's Brian Sozzi back in March: "It's pretty clear to me there are only one or two outcomes for me here: Either I'm coming home in defeat or I'm coming out victorious."
This year, investors have come to favor safe harbors over new risks, today's known quantities over tomorrow's disrupters. The war in Ukraine and associated increases in energy costs have added to these challenges, but the fate of Peloton and many of its peers was sealed months before.
Companies like Peloton were the first to tell us what the Fed's policy changes would mean for investors and the broader economy. And on the eve of Powell's biggest speech of the year, Peloton continued to send a message about the road ahead.
What to Watch Today
Economic calendar
8:30 a.m. ET: Personal income, July (+0.4% expected, +0.6% previously)
8:30 a.m. ET: Personal spending, July (+0.6% expected, +1.1% previously)
8:30 a.m. ET: Whole inventories, July (+1.4% expected, +1.8% previously)
8:30 a.m. ET: Retail inventories, July (+2% previously)
8:30 a.m. ET: PCE, month-on-month, July (+0.1% expected, 1% previously)
8:30 a.m. ET: PCE, year-on-year, July (+6.4% expected, +6.8% previously)
8:30 a.m. ET: Core PCE, month-on-month, July (+0.3% expected, +0.6% previously)
8:30 a.m. ET: Core PCE, year-on-year, July (+4.7% expected; +4.8% previously)
10:00 a.m. ET: University of Michigan consumer sentiment, August (55.2 expected, 55.1 previously)
Earnings
No major earnings set for release.
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