Raphael Stevens

Shares of GM on Tuesday opened at their lowest point since September following Morgan Stanley’s downgrade of the company’s stock to equal weight from overweight.
The downgrade was due to GM’s 2022 guidance coming in “well below” Morgan Stanley’s forecast on top of concerns over the pace of the automaker’s EV transition.
Morgan Stanley also lowered its price target on GM’s stock to $55 from $75.

A General Motors sign is seen during an event on January 25, 2022 in Lansing, Michigan. – General Motors will create 4,000 new jobs and retaining 1,000, and significantly increasing battery cell and electric truck manufacturing capacity.
Jeff Kowalsky | AFP | Getty Images

DETROIT – Shares of General Motors tumbled in early trading Tuesday, opening at their lowest point since September after Morgan Stanley downgraded the company’s stock.
The Detroit automaker’s 2022 guidance was “well below our forecast,” Morgan Stanley top automotive analyst Adam Jonas wrote in an investor note, dropping the shares from overweight to equal weight. He also noted concerns over the pace of GM’s transition to electric vehicles in lowering the bank’s 12-month price target on GM’s stock to $55 from $75, up 8.5% from its closing price Monday.

Jonas called the downgrade “the most significant estimate reduction” from Morgan Stanley regarding GM since the onset of the coronavirus pandemic in early 2020.

“We acknowledge the $20 reduction in our GM price target is significant and [is] paired by what we believe is a ‘narrative change’ in our outlook compared to our prior investment thesis,” Jonas wrote.
GM shares fell by as much as 6.2% during intraday trading Tuesday to $47.58, off 29% from their 52-week high of $67.21 a share on Jan. 5. The stock slightly recovered throughout the day to close down by 2.5% to $49.46 a share. The stock’s 52-week low is $47.07 a share.
GM’s 2022 forecast includes an operating profit of between $13 billion and $15 billion, or $6.25 and $7.25 earnings per share, and net income of between $9.4 billion and $10.8 billion.
Morgan Stanley’s revised its earnings-per-share forecast for GM is $6.64, a cut of roughly 11% from its previous forecast of $7.49.

Jonas said while GM “has big plans” for its new line of electric vehicles, there’s “rising execution risk on an absolute and relative basis more than we previously believed.” That could translate into a slower-than expected ramp-up of EVs in North America.

GM is targeting combined EV sales of 400,000 units in North America in 2022 and 2023, on its way to a production capacity of more than 1 million each for China and North America by 2025.
Morgan Stanley previously forecast GM would sell 114,000 EVs globally this year, followed by 600,000 in 2025, excluding a Chinese joint venture with Wuling that’s selling a small EV in that market
Jonas has pushed the company to split its Ultium battery, EV and autonomous-driving operations from the rest of the automaker, which CEO Mary Barra has steadfastly refused.
Jonas also cited Barra’s “One GM” strategy and slower-than-expected ramp-up in commercializing its Cruise autonomous vehicle unit as a reason for the downgrade.
Shares of GM are down by about 16% in 2021.
– CNBC’s Michael Bloom contributed to this report.

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Peloton founder John Foley, who is on the way out the door as CEO, issued a mea culpa on Tuesday for past missteps, as the connected fitness company undergoes a massive restructuring.
Chief Financial Officer Jill Woodworth said there will be cuts in real estate and marketing, with no segment of the business off the table for right-sizing.
Peloton has very loyal users, however it must find a way to not only add new subscribers but to also make more money from its existing customer base.

In this photo illustration the Peloton Interactive logo seen displayed on a smartphone screen.
Rafael Henrique | LightRocket | Getty Images

Peloton founder John Foley, who is on the way out the door as CEO, issued a mea culpa on Tuesday for past missteps, as the connected fitness company undergoes a massive restructuring.
“We own it. I own it. And we are holding ourselves accountable,” Foley told analysts on a conference call. “That starts today.”

The company slashed its full-year financial targets, as it continues to lose money. Peloton said it expects to achieve at least $800 million in annual cost savings and it will cut planned capital expenditures by roughly $150 million this year. As part of these efforts, about 20% of its corporate workforce, or about 2,800 people, will lose their jobs.
Chief Financial Officer Jill Woodworth said there will be cuts in real estate and marketing, with no segment of the business off the table for right-sizing. Foley described the entire experience as “humbling.”

As analysts and investors digest all of the announced changes, including the appointment of incoming CEO Barry McCarthy, they now also must reassess what kind of company Peloton is going to be coming out of the Covid pandemic. The potential market for fitness equipment may have been artificially inflated by the health crisis, which forced many people temporarily away from gyms.
Peloton, in turn, has set lofty goals for its total addressable market. But it’s unclear if it will still be able to achieve those targets. Shares are rallying, though, as investors believe Netflix and Spotify veteran Barry McCarthy might be the one to help it inch closer.
The company has previously said that its total addressable market is 67 million households globally, of which 45 million are in the United States. As of Dec. 30, Peloton counted more than 6.6 million members globally, including those people who don’t own any equipment but who only pay for monthly access to the company’s on-demand workout classes.

When asked about this on Tuesday, management said the company doesn’t believe Peloton’s market opportunity has changed in recent months, despite the reported waning sales growth. The cost actions that the company is taking are independent of the company’s longer-term growth prospects, it said.
“We have work to do,” said Woodworth. “But we’re going to study what our post-Covid demand is without going dark on marketing, to better understand the baseline, and we’re going to get back to efficient marketing next year.”
“We’ll go back to the basics over the next several quarters,” she added. “We feel good about that.”

McCarthy’s ‘to-do list’

Still, Peloton hasn’t been incredibly forthcoming about how it plans to achieve these goals, and what growth will look like in the coming quarters. Conversations on Tuesday centered around cost cuts and a new CEO. Perhaps it will be left up to Barry McCarthy to set a three- or five-year plan, once he is settled in.
Dan McCarthy, assistant marketing professor at Emory University, points out that a price reduction on Peloton’s original Bike, initiated last fall, didn’t spur demand for the machine like the company had hoped. Last week, the company began charging a fee of $250 for delivery and setup of the Bike, and a $350 fee for those services on its Tread, effectively raising prices.
“It doesn’t seem to me like prices are very effective lever in bringing a whole lot of new people in,” said McCarthy, who is not related to the incoming Peloton CEO. “And I don’t think that they are going to somehow be able to change that.”
Peloton also reiterated Tuesday that it believes the market for treadmills is much bigger than that of its cycles. But it still has a ton of work to do to build awareness around its treadmills, in part because of a recall that took its Tread and Tread+ temporarily off the market. For too many consumers, Peloton is thought of as a cycling brand.
As of June 30, only about 3% of Peloton’s connected fitness subscribers had both a Bike (or Bike+) and a treadmill product.
“Peloton management is suggesting that despite completely changing the cost structure and completely changing their operating structure, they see no change to the the top line … no changes to the long-term opportunity,” said BMO Capital Markets analyst Simeon Siegel. “That raises questions.”

Peloton’s advantage: Loyalty

One final advantage that Peloton has, and which Barry McCarthy likely realizes, is its loyal members. The company has done a decent job of maintaining subscribers, as evidenced by its very low churn rate.

Peloton reported an average monthly churn rate in the second quarter of 0.79%. That’s lower than the 0.82% it reported in the first quarter and slightly above the 0.76% it saw in the year-ago period.
Last August, as it became harder for Peloton to predict where user trends were headed, the company said it would no longer forecast churn rates on a quarterly or annual basis. But it did say that over time it anticipated churn and retention rates would remain “relatively consistent.”
The takeaway is that even if new users are harder to come by, Peloton is showing it can keep its current ones happy.
This begs the question: What kind of company will Peloton be over the longer term? Will it be a high-growth business — disrupting the fitness industry — or one that generates a more predictable and recurring revenue stream? The answers are going to help determine how investors value the company’s stock.
If Peloton can increase the value of each of its subscribers, it will be in better shape. Stifel analyst Scott Devitt previously calculated that the lifetime value of a Peloton customer is about $4,500 in gross profit.
One of Barry McCarthy’s top priorities might very well be to get those existing users to spend more money within the Peloton ecosystem, such as on apparel, additional equipment or services.
That will work if users remain as loyal as they have been. Within Peloton’s latest financial report, one concerning metric was that subscribers cut back on their monthly workouts. This could stem from many factors. It could be a sign of hybrid usage, for those who can afford it: Mixing a gym membership with a Peloton membership. But it could also be a sign that some are growing tired of the platform.
Average monthly workouts per connected fitness subscriber in the latest quarter dropped to 15.5, compared with 16.1 in the prior period and 21.1 in the year-ago period. Notably, this falloff in usage occurred during the winter months, when people tend to stay indoors rather than workout outside, and as the omicron variant was spreading rapidly.
Citi analyst Jason Bazinet said that although there are risks associated with how Barry McCarthy chooses to execute a turnaround plan, Peloton shares are likely rising as investors gain clarity around costs cuts and the company’s cash position.
Peloton shares closed Monday up more than 25%, at $37.27. The jump brought the stock back to levels not seen since early January. Peloton’s market cap is about $12.2 billion.
In the near term, Peloton appears committed to fixing underlying issues on its own rather than selling the company to a potential suitor such as Amazon or Nike, he said.

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“I think the chances are very high FDA to approve it,” Bourla told CNBC, saying he believes the agency will be pleased with the data.
Data on the vaccine for kids under 5-years-old is expected on Friday when briefing documents for the FDA’s vaccine advisory committee are published.
Pfizer and BioNTech asked the FDA last week to expand the authorization for its vaccine to most kids under 5.

Pfizer CEO Albert Bourla on Tuesday said he believes the Food and Drug Administration will authorize the company’s Covid vaccine for children under 5 years old under a fast-track process that allows the agency to review the data as soon as researchers compile it in real time.
“I think the chances are very high for FDA to approve it,” Bourla told CNBC’s Meg Tirrell, while noting that the regulatory process still has to play out. “I think that they will be pleased with the data and they will approve,” he said.

Data on Pfizer and BionTech’s vaccine for kids under 5 years old is expected on Friday when briefing documents for the FDA’s vaccine advisory committee are published. The committee has a meeting scheduled for Feb. 15 to discuss the shots for young kids.

Pfizer CEO Albert Bourla talks during a press conference with European Commission President after a visit to oversee the production of the Pfizer-BioNtech Covid-19 vaccine at the factory of US pharmaceutical company Pfizer, in Puurs, on April 23, 2021.
John Thys | AFP | Getty Images

Pfizer and BioNTech asked the FDA last week to expand the authorization for their vaccine to most kids under 5. The FDA had asked the companies to start submitting data for authorization of the first two-doses of the three-dose vaccine for children six months through 4-years-old.
Pfizer and BioNTech expect kids under 5 will ultimately need three doses for the highest level of protection against the omicron Covid variant and future strains of the virus. The companies said data on the third dose will be finished and submitted to the FDA in the coming months.

CNBC Health & Science

Pfizer amended its clinical trial for younger kids in December to study a third shot after the first two doses did not produce an adequate immune response in children 2- to 4-years-old. Younger kids will receive a smaller, three microgram dose compared with the 30 microgram shots that are approved for adults.
Children under 5-years-old are the last age group left in the U.S. that isn’t eligible for vaccination. There has been growing public pressure from many parents and doctors for the FDA to speed up authorization of the vaccine as the omicron variant has lead to an increase in children hospitalized with Covid.

Pfizer and BioNTech said last week that their application for emergency approval came in response to an “urgent public health need” for younger children as omicron has caused an unprecedented wave of infection across the country.
White House chief medical advisor Dr. Anthony Fauci said last month that he expects the vaccine to receive FDA authorization in February.

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Toyota is making big bets on hybrids and electric vehicles after dethroning General Motors as America’s top automaker.
“I’m very, very optimistic that we’re going to have another great year in 2022,” Toyota North American sales chief Bob Carter told CNBC on Tuesday.
Toyota has two EVs coming out this year as well as a new hybrid pickup in the Tundra line.

Toyota is making big bets on hybrids and electric vehicles after dethroning General Motors as America’s top automaker.
“What we are still seeing today is that many consumers that are in the full battery electric market still need a second car to fit family needs. So the demand for hybrid has been strong and we expect it to continue to grow as the entire industry transitions over to electrification later this decade,” Toyota North American sales chief Bob Carter told CNBC on Tuesday.

Carter expects Toyota’s hybrids to make up over 30% of vehicle volumes compared to around 26% last year — provided that supply chain disruptions clear up in the second quarter of this year.
His comments on “Squawk Box” come after Toyota beat GM last year as the best-selling automaker in the United States for the first time in a century. GM has held the position since 1931. Carter said that while he is unsure the Japanese automaker will defend its title, he expects Toyota to continue its trajectory.
Long term, Carter said, staying No. 1 in the U.S. may be not sustainable. “The results were the results, but much of that has to do with the supply chain stability. But I’m very, very optimistic that we’re going to have another great year in 2022.”
Carter said Toyota is forecasting a 16.5 million unit U.S. auto industry in the second quarter when it expects the supply chain to become stable across the sector.
The semiconductor chip shortage continues to affect vehicle manufacturing plants across the industry. For example, chip shortages forced Ford Motor to cut down production of some of its vehicles including the Ford Bronco and Ford F-150 next week.

Toyota has two EVs coming out this year. The Toyota bZ4X is expected to arrive in the spring and the Lexus RZ45e is expected to release late in the year. Toyota is also extending its hybrid strategy, adding to its Tundra pickup offerings a new model called i-Force Max this spring, according to Autoweek.
Carter said that while he expects a “slow ramp up as we enter this new manufacturing world of battery electrics,” Toyota will continue adding EVs to its fleet as a core part of its future growth.
“That’s the first of many battery electrics that are coming. So we think right now the infrastructure as well as consumer demand is at the tipping point that we’re going to start entering and bringing more and more of these models to the market,” he said.

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The only Johnson & Johnson facility making usable batches of the company’s single-shot coronavirus vaccine has temporarily halted its production, The New York Times reported.
The Netherlands-based plant has instead focused on making a different, possibly more profitable vaccine aimed at a non-Covid virus, people familiar with the matter told the Times.
The pause, which began late last year, could reduce the supply of J&J’s Covid vaccine by hundreds of millions of doses, one of those people said.

Syringes and a box of Johnson & Johnson vaccine.
Paul Hennessy | SOPA Images | LightRocket | Getty Images

The only Johnson & Johnson facility currently making usable batches of the company’s single-shot coronavirus vaccine has temporarily halted its production, a new report said Tuesday.
The Netherlands-based plant has instead focused on making a different, possibly more profitable vaccine aimed at a different virus, The New York Times reported, citing people familiar with the matter.

The pause in production at the Leiden facility, which began late last year, could reduce the supply of J&J’s Covid vaccine by hundreds of millions of doses, one of those people told the Times.
It is unclear whether vaccine supplies have been been affected by the company’s move, according to the report. J&J is preparing to have the Leiden plant restart Covid vaccine production in March, the Times reported.
J&J spokesman Jake Sargent didn’t directly comment on the Times’ article. He told CNBC in a statement the company is “focused on ensuring our vaccine is available where people are in need,” and that it is fulfilling its obligations to the international groups trying to boost access to the Covid vaccine.
J&J is continuing to deliver batches of the vaccine materials to sites that bottle and package doses, and “we currently have millions of doses of our Covid-19 vaccine in inventory,” Sargent said.
“We are proud of the work of our many industry partners and the collaborations we have developed to produce our Covid-19 vaccine,” he said.

Polls show that many Americans have taken a skeptical eye toward the J&J Covid vaccine, which is the only one approved by the U.S. Food and Drug Administration that requires just a single shot as a primary dose, versus the two-dose regimen of vaccines produced by Pfizer and Moderna.
The FDA last year recommended pausing the use of the J&J vaccine following a small number of reports of recipients developing rare blood clots. It was also found to be less effective against the deadly delta variant that emerged last year.
But several studies have shown the shot remains effective at preventing hospitalization and death from Covid, and a booster dose has been shown to be effective in protecting against severe illness from the highly transmissible omicron variant.
The J&J vaccine is also easier to transport and distribute, owing to the fact that it requires just one dose and can be stored without a freezer, providing protection for people who may otherwise be unable to get fully vaccinated.
Read the full report from The New York Times.

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EV start-ups Nikola, Lordstown Motors, Canoo, Faraday Future, Fisker and Lucid Group all went public through SPAC deals over the last two years.
All of their shares have fallen by double-digits so far this year and are trading at or near 52 week lows.
All but two, Fisker and Faraday Future, have disclosed federal investigations.
Nikola founder Trevor Milton is scheduled to go on trial April 4 for allegedly defrauding investors in that company’s IPO, among other things.

Electric Last Mile Solutions CEO James Taylor wanted to separate his electric vehicle company by staying out of controversies that had engulfed many of his competitors.
“We have no lawsuits; no management issues, that we’re aware of; we’re delivering; we’re keeping our nose clean,” the former General Motors executive told CNBC in early November, calling the start-up’s approach “conservative” and “anti-climactic.”

Taylor was successful in doing so until last week, when he and Chairman Jason Luo, both cofounders of the company, resigned from their positions late Tuesday following an internal probe into some of their share purchases.
The resignations led to several analyst downgrades, causing ELMS shares to plummet by 53% last week, including a more than 50% drop on Wednesday. The stock is down another 17% so far this week to less than $2 a share.
ELMS’ problems are the latest for EV start-ups that went public though special purpose acquisition companies, or SPACs over the last year or two. Troubles at other companies have similarly led to executive outings as well as investigations by the Department of Justice and Securities and Exchange Commission.

The ELMS Urban Delivery, anticipated to launch later this year, is expected to be the first Class 1 commercial electric vehicle available in the U.S. market and will be produced at the Company’s facility in Mishawaka, Indiana.
Electric Last Mile Solutions

“We’re in a place where the SEC and others have become deeply skeptical about SPACs,” said Priya Huskins, partner at Woodruff Sawyer, a consulting firm and a leading insurance broker in the SPAC market. “It is very unhelpful to SPAC world to have even a whiff of scandal, and self-dealing scandals are amongst the worst.”
After an unprecedented year of SPAC-backed IPOs, the market is getting crushed in the new year as speculative stocks with little-to-no earnings fall further out of favor in the face of rising interest rates.

The proprietary CNBC SPAC Post Deal Index, which is comprised of SPACs that have completed their mergers and taken their target companies public, tumbled 23% in January — even more abysmal than the tech-heavy Nasdaq’s 9% loss, its worst month since March 2020.

EV SPACs

SPACs are publicly traded companies that don’t have any real assets other than cash. They are formed as investment vehicles with the sole purpose of raising funds and then finding and merging with a privately held company.
It’s a faster way to take a company public than a traditional IPO but many have run into both financial and legal trouble following a crackdown last year by the SEC, led by Chairman Gary Gensler.
Gensler “is completely focused on disclosures and transparency to retail investors in a post de-SPAC M&A environment,” securities attorney Perrie M. Weiner, a partner at Baker McKenzie in Los Angeles, said in an email to CNBC.

The SEC declined to comment on whether it’s opened an investigation into ELMS. The company has not disclosed any investigation.
EV start-ups Nikola, Lordstown Motors, Canoo, Faraday Future Intelligent Electric, Fisker and Lucid Group all went public through SPAC deals over the last two years. All but two, Fisker and Faraday Future, have disclosed federal investigations. Nikola founder Trevor Milton is scheduled to go on trial April 4 in Manhattan for allegedly defrauding investors in that company’s IPO, among other things.
Other than Lucid, most have performed horribly for investors after receiving initial pops when their deals were announced or when the companies went public. All of their shares, including Lucid, have fallen by double-digits so far this year and are trading at or near 52 week lows recently.
“I think it’s going to be a challenge for all of them to scale up and be successful,” said Morningstar analyst David Whiston, who previously warned of an EV-SPAC bubble. “It wouldn’t surprise me that over the next decade or sooner, some of these firms either go away or get acquired.”
Faraday Future also announced a shakeup of its board last week, naming a new chairperson, cutting pay of two top executives and suspending at least one other. The actions followed an internal investigation that determined employees made inaccurate statements to investors about involvement of the company’s founder, Yueting “YT” Jia, and vehicle reservations.

ELMS

The resignations at ELMS are not believed to be a result of any illegal activity, according to several analysts who cover the company. But a public filing by ELMS to the SEC alludes to potentially wrong or misleading information about the purchases.
The Michigan-based start-up said in a securities filing that an internal investigation by a special committee of the board found that some executives, including Taylor and Luo, purchased equity at substantial discounts to market value without obtaining an independent valuation shortly before the company announced an agreement to go public in December 2020.
ELMS declined to comment much beyond its press release and the filing. In an email Monday to CNBC, a spokesperson said “the board accepted their resignations in the best interest of ELMS and its stockholders.”
While such purchases aren’t illegal, they must be properly disclosed and properly accounted for by those involved, Huskins said.
“You get the impression from the 8-K that there was a lack of transparency in what was going on,” Huskins said, citing a line in the filing that said executives gave responses to the committee that were “inconsistent” with the company’s own documents.

Huskins said that line “is the closest you’ll ever see in an 8-K to a company calling insiders liars.”
ELMS said it will have to restate its prior financial statements, warning investors that its quarterly earnings reports “should no longer be relied upon.”
Taylor and Luo will maintain consulting roles with ELMS; Taylor’s contract pays $300,000 a year. But they both had to give up millions of company shares. Taylor forfeited 1.8 million in shares valued at $3.3 million while Luo was forced to give up 6 million shares worth about $10 million.
Retaining the two, which one financial analyst called the “dynamic duo,” is likely because the ELMS Board believes losing them would harm the shareholders more than paying him a two-year consulting fee, Huskins said.
“It is surprising to see an ongoing consulting fee given what they said in the 8-K in the difference between Mr. Taylor’s responses and the documentation,” Huskins said.
Huskins said the transactions may draw the SEC’s attention, given the skepticism by federal regulators of SPACs. The boom-and-bust cycle of SPACs right now is reminiscent of the IPO boom of the 2000s, she said.
“We saw a huge bubble. We are seeing a correction. And over time, you’re going to see only the higher quality private companies make it into the public company world through SPACs,” she said. “For capital markets and for SPACs as a path to going public, it’s a good thing to see a little bit more skepticism by the market and by regulators.”
– CNBC’s Yun Li contributed to this report.

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