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Peloton and Carvana: the pandemic stars headed in different directions

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During the pandemic, Americans desired more wheels, both stationary and mobile. Two of the standout winners of 2020 were Peloton, the pricey exercise bike company, and used auto retailer Carvana. Both were lossmaking business models with complex supply chains. Regardless, their market capitalisations peaked at about $50bn in 2021.

Both were left exposed when interest rates rose in 2022. This forced the companies to slash costs and pivot their business strategies. Only one has made retrenchment work. Carvana shares are up more than 30 times since the end of 2022. Its market cap has recovered to $25bn.

Peloton continues to sink. Its market cap has fallen to just over $1bn and it is shouldering a $2bn debt load. It is possible that expensive, at-home exercise equipment was a lockdown fad while cars were a necessity. But equity and credit investors failed to perceive this difference three years ago.

For 15 months, Carvana has been steadily cutting back more than $1bn in annual overhead costs. Profitability soared even as its sales volumes declined sharply. Now sales are rising. In the recently completed first quarter, units sold rose 16 per cent. Shares rallied by a third in response.

Last year, Carvana cut a debt restructuring pact with the hedge funds that held more than $5bn of its bonds. Notably, it deferred hundreds of millions of annual cash interest expense payments until 2025. The company now says profits and cash flow are sufficiently formidable to support debt service and capital expenditure without the need to raise fresh cash. This inflection point has sent its equity value soaring.

Peloton has also tried its hand at austerity. But manufacturing and shipping hardware efficiently has proved difficult. The company remains only breakeven on a gross profit basis. Digital subscriptions, on the other hand, generate strong cash. However these have stagnated at just about 3mn users.

The company is only forecasting slightly positive cash flow even after it has slashed another 15 per cent of its workforce. By 2026 it must refinance or pay off a $1bn convertible bond. This may require a Carvana-like fight.

Cutting immediate costs to stockpile cash while also finding a path to building at profitable scale is a hard trick to pull off. Carvana has shocked Wall Street with exactly such a turnaround. Time is running out for Peloton to try to do the same.

sujeet.indap@ft.com

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