Apple (AAPL) is known for transforming the industries in which it bets big on.
So when the apple brand launched its Fitness+ service in 2020 to offer its subscribers, in particular owners of an Apple watch, hundreds of courses led by real coaches employed by Apple, there was no doubt that the Cupertino, Calif.-based company wanted to replace and become everyone's sports coach.
In view of these stated ambitions, a takeover of Peloton (PTON) could be logical to quickly achieve its objective. A kind of springboard, a bit like the takeover of Beats had propelled Apple Music and Tim Cook's group into the music and hype sphere.
Apple is sitting on war chest of billions of dollars and indeed can get its hands on Peloton without breaking the bank. It would even be a pittance. Peloton had a market capitalization of a little bit over $11 billion as of time of writing.
But would Apple make an offer to buy Peloton?
To answer that question, it's worth looking at what Peloton can offer Apple. The activity of the fitness group is rather simple to understand. It is divided into two: a part dedicated to consumer hardware and another to contents such as class subscriptions that allow customers to take an assortment of live and on-demand classes.
Peloton
Hardware
Peloton sells at-home fitness equipment, such as exercise bikes and treadmills, which makes the company a web-connected devices firm.
If Peloton struggled to meet demand for bikes and treadmills at the height of the pandemic, the group is now struggling to sell them. The revenues generated by the hardware division have thus been in continuous decline over each quarter for at least a year. In the last quarter ended Dec. 31, these revenues decreased by 8.5% to $796.4 million.
On the other hand, the cost to manufacture these products increased by 32.5% over the period. Worse, the margins are very low, a bit like in the traditional automobile. Connected fitness product gross margin was 6.4% as of Dec. 31.
"Our Connected Fitness gross profit margin was primarily impacted by the August 2021 Peloton Bike price reduction, higher supply chain and logistics expenses per delivery, increased material and component part costs, and charges associated with the voluntary recalls of Tread+ and Tread," Peloton explained in a press release.
The group itself recognizes that it must do better in this division, in particular by making more savings "to better align our investments and organizational structure with our updated view of the post-COVID demand landscape," wrote John Foley, in his letter to shareholders, announcing his resignation as CEO.
He added that "savings will primarily come from efficiencies in procurement, manufacturing, and logistics."
Peloton is the proof that producing bikes is expensive and brings little profit in view of the margins. This is one of the reasons why Apple hesitated before finally giving up on getting into the automotive sector, according to experts.
Apple, which masters the art of managing the supply chain, has the knowledge to manufacture products and equipment -- iPhone, Mac, iPads, Apple watch, AirPod, HomePod -- and to distribute them at low cost.
Apple's gross margin for the December 2021 quarter was 43.8%, up 160 basis points from last quarter due to volume leverage and favorable mix. Products gross margin was 38.4%, up 410 basis points sequentially, driven by leverage and mix, the company reported on January 28.
Besides, Apple doesn't really need Peloton if it wanted to produce a connected bike. In view of its product line, we can decently imagine that Apple has the necessary talents.
The Subscription Business
That entitles subscribers to access online gym classes and workouts. This is undoubtedly the interesting point for Apple. Peloton's catalog, which includes partnerships with stars like Beyonce, could strengthen the Fitness+ offer. Apple would also get their hands on a reservoir of important data.
This division seems to be doing well. Its revenue jumped 73.3% to $337.5 million in the quarter ended Dec. 31, compared to the same period a year ago.
The unit, which has more than 6.6 million members, makes money. Its operating profit has almost doubled in one year to $229.3 million with gross margin of 67.9%, up from 60.3% in December 2020.
"While there are variable costs, including music royalties, associated with our Connected Fitness Subscriptions, a significant portion of our content creation costs are fixed given that we operate with a limited number of production studios and instructors," the company said. "The fixed nature of those expenses should scale over time as we grow our Connected Fitness Subscription base."
But it's not sure that's enough to convince Apple to take the plunge. Fitness+ has the financial power to convince creators to create original content for the platform and forge exclusive partnerships with artists.
"Fitness+ meanwhile continues to inspire customers to reach their health and fitness goals. We recently introduced Time to Run, an extension of our popular series Time to Walk, as well as new collections of workouts and meditations to help users make more intentional training choices," CEO Tim Cook said during the fourth-quarter earnings call.
He added that "despite the pandemic, our retail businesses saw its highest revenue in Apple’s history and we also earned our highest ever customer satisfaction scores."
