Garmin or Apple to buy Peloton in 2024?

Apple has its problems.

But being one of the largest companies ever, all of its problems fall in the ‘nice to have’ category. Strong sales growth towards the back end of 2023 saw overall revenue rise for the first time in a year or so with Service Revenues hitting an all-time high and EPS up 16%, also to an all-time high (Jan 2024 figures).

Whilst iPhone sales might be described as ‘shakey’ in certain regional markets, its Watch sales will probably be OK globally for a few more years and Vision Pro marks the potential for a whole new category of growth.

But we still live in the world of global capitalism and Apple’s shareholders will want more. Always more.

Peloton represents a significant opportunity for Apple, especially as the company’s share price is at a historically low level. Then again, with the NASDAQ close to the all-time high levels, Peloton’s share price is low for a reason. One of those reasons is that Peloton is loss-making.

It’s worth noting that Peloton’s $4.21 share price represents a market capitalisation of $1.52bn. However, stock market prices reflect the fact that no single entity has control. If you want control, ie if you want to buy the company, then you pay a premium, that’s called the control premium. Apple will certainly need to pay more than $1.52bn to buy Peloton today. Indeed I would have thought it would be at least $4bn and I’ve seen generic estimates of 20-40% ($1.7bn-$1.9bn) and older analyst estimates of up to $10bn when Peloton’s market cap was higher.

Apple has a history of buying companies, the most expensive being Beats Inc. in 2014 for $3.2bn. It must be reasonably likely that Peloton would be Apple’s biggest-ever acquisition.

Garmin has its problems too but it also has $1.5bn in the bank. Whereas Apple has both supply and demand risk associated with China, Garmin has neither to the same degree, at least not directly. Sure its supply chain will certainly include Chinese components and it also sells to China but perhaps its biggest risks are linked to Taiwan (Chinese invasion in 1-3 year time horizon) and a product range that is somewhat stagnant and mature – where is Garmin’s equivalent of Apple Vision Pro as a saviour of the future?

Scenario 1: Garmin to buy Peloton

First up, this just isn’t going to happen despite the existence of excellent complementarities. An acquisition of Peloton by Garmin would empty the bank for the latter and require capital to be raised or more shares issued both diluting existing shareholder value. Furthermore, much of Peloton’s revenue is from subscriptions and online sales, which is a markedly different business model from Garmin’s core model of selling hardware through relatively complex sales channels. I suppose you could argue complementarity.

Arguments for Garmin acquiring Peloton:

• Garmin is a leader in sports/fitness wearables and cycling hardware, making them well-positioned in the indoor and outdoor fitness market.
• Cross-selling opportunities exist, with Peloton subscribers incentivized to use Garmin watches and benefit from Garmin’s physiological ecosystem.
• Garmin has a substantial cash reserve of $1.6 billion and a track record of good management, making it capable of financing the acquisition.
• Garmin has an established sales network that can be leveraged to distribute Peloton products.
• Peloton’s current focus on North America, the UK, and Germany can be extended with Garmin’s global reach.
• Acquiring Peloton would instantly establish Garmin as a major player in connected indoor fitness, both in terms of hardware and content/instructors.
• A tie-up with Peloton could strengthen Garmin’s brand reputation.

Arguments against Garmin acquiring Peloton:

• Fitness hardware is not Garmin’s primary area of expertise, and the supply, distribution, and support of such hardware have different complexities and scales compared to Garmin’s core business.
• Peloton’s brand is centred around live/on-demand classes, while Garmin’s strength lies in sensors and navigation for outdoor sports.
• Integrating Peloton’s subscription model and lifestyle content creation differs from Garmin’s focus on activity and health tracking, making the compatibility of the two uncertain.
• The long-term demand for home fitness equipment is uncertain, and increased competition in the market could pose challenges.
• Acquiring Peloton would be a significant financial undertaking for Garmin, representing its largest purchase and requiring substantial financing.
• While it’s unlikely, competition regulators might scrutinize the deal.

Sceanario 2: Apple to buy Peloton

Some analysts believe that Apple may acquire Peloton this year. There are several reasons why this acquisition could make sense. Apple is looking for opportunities in a growing market that has a technological focus and barriers to entry. They want to offer premium products, accessories, and subscription services. Apple’s own Fitness+ service, while it has some good features, falls short in certain areas like indoor running, cycling, smart weights, and rowing. They need to expand their offerings to cater to the whole family.

Acquiring Peloton could be an excellent strategic move for Apple.

• Peloton operates in the connected fitness market, which is experiencing rapid growth.
• Peloton’s extensive library of live and on-demand workout classes could complement Apple’s Fitness+ service and create a comprehensive subscription offering.
• Apple’s global customer base could help accelerate Peloton’s expansion beyond its current focus on the US market.
• Integrating Peloton’s Tread and Bike with Apple Watch could create a unified indoor and outdoor health platform.

However, there are arguments against this acquisition as well.

• Large fitness hardware is not Apple’s core business, and taking on Peloton’s supply chain and customer service challenges could be risky. Additionally, Apple stores may not be suitable for showcasing Peloton’s large products in their current format.
• There is a risk of alienating loyal Peloton users if the integration with iOS/macOS overly excludes Android customers.
• Subscription pricing between Fitness+ and Peloton would need major adjustments to align.
• The cost of acquiring Peloton is significant and carries its risks.
• Competition regulators may scrutinize the deal, it is unlikely to be a significant obstacle.
• Demand for high-cost indoor fitness hardware may continue to decline post-pandemic.

Take Out

The future is notoriously tricky to predict.

After 8 more months of struggling, I predict Apple will buy Peloton in late Q3.2024.

I would rate the chances of Garmin buying Peloton as close to zero. Perhaps we would see a deal if Peloton came close to collapse.

Note: I don’t own shares in either Apple or Peloton and this is not financial advice.