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Analyst believes Peloton's community will keep business steady despite treadmill recall

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JMP Director Ron Josey joins Yahoo Finance to discuss the state of Peloton after the company had to recall its treadmill.

Video Transcript

SEANA SMITH: We want to talk about Peloton. It's a big report that investors are waiting for here after the bell. The stock under a tremendous amount of pressure yesterday, off just around 14%, following the fact that Peloton said it was recalling all of its treadmills. We want to bring in Ron Josey. He's JMP's managing director. And Ron, I guess, when you take a look at the announcement yesterday, how big of a deal is this for Peloton?

RON JOSEY: Well, we're going to get more information about that in the next hour or so with the earnings and the call coming out. I think you can-- your imagination can sort of go both ways. One is you hope that there's a relatively quick fix to both the Tread and the Tread Plus. And so, if that's the case, then the impact wouldn't be that bad. But of course, if it's a longer term fix and it requires, you know, more, call it hardware implementations, then it could last a little longer.

The issue here is tread and tread plus sales, which are about 10% of Peloton sales today, around there, are not being sold currently. And so, the big issue is, what does that mean in our numbers for the next quarter or so? But frankly, you know, bigger picture, the trend market is significantly larger than the bike market is today. And this we look at as pretty much, obviously, not a great result and tragic in terms of the accident that happened. But it's more of a pause simply because the demand that we think that Peloton has. And really, the community base and everyone else and everything else that they offer is hard to replicate.

ADAM SHAPIRO: Ron, you just said more of a pause, and I wanted to ask you about that because our managing producer in our morning meeting said, look, you've got 100,000 of these things that are totally being recalled at roughly $3,500 a pop. You're looking at $350 million. Is that going to be the hit to Peloton? Will it be less? Could it be more?

RON JOSEY: Yeah, so we'll have to see what that is. I mean, I think they offered two options, right? You can have it picked up and just returned and get your money back. And you have them until I think the fall to do that. Or you can have Peloton come out and move into a place that's more safe in your home if you'd like. We-- of course, anybody's guess in terms of what those 100 plus, that 135,000, 125,000 plus devices, what happens there.

Our view is the vast majority won't return the actual machine and, likely, maybe even ask Peloton to move it in their homes. But we actually believe the vast majority actually have some sort of put it in a place that's relatively safe within their family and their home. So we don't-- we'd be surprised if it's a full 125 plus thousand of these devices.

SEANA SMITH: Ron, do you think their reputation's damaged, or is this something that in six months or 12 months from now, people are going to forget about?

RON JOSEY: It's amazing. You know, what Peloton has created with-- we like to call it the three Cs. Between the content, the community, and just the convenience of their workout, it's something that we've never seen before, we meaning the society and in terms of such an efficient workout in your home. And so, of course, everything-- the whole pandemic has been pretty wild. And that demand for Peloton has just gone through the roof.

The company has been working extremely hard to bring on a new factory so that you have the capacity to satisfy that demand. There's been a little black eye there because it has-- the wait times have gone up. But now you have this. Our view here is that this will-- I think the awareness of the brand, the following of the brand, the NPS scores of the brand, I think will overcome any shorter term sort of impacts that you're seeing today. So we actually think this is more of a shorter term issue than longer term.

ADAM SHAPIRO: And Ron, as you pointed out, not to minimize the tragedy that took place, but I'm thinking back, old enough to remember the Tylenol scare years and years ago and the way they took everything off the market and then reintroduced. Is Peloton, in doing this very drastic step-- will take all of these off the market and then come back. It seems like the right step. Do they get goodwill with the consumer going forward because of that?

RON JOSEY: I think that's a really good point. The fact that they actually fought the CPSC, or at least, decided not to follow the recommendations at first, and then to come full circle and say, fine, we'll fix it, and that's the right thing to do, I think you do get some goodwill with that. And, you know, we as consumers have seen product recalls over and over again, not only from devices like this, but also your cars or other things.

And so, I think they'll be able to overcome this. And our view here is once you get the software fix that basically puts some sort of code on the machine, once you get maybe a hardware fix that makes the underbelly a little bit-- folks or things can't get underneath the actual Tread, I think we'll be able to get over it. And I imagine that's got to be relatively short term that we get fixes like that.

SEANA SMITH: Ron, real quick, we only have about 30 seconds here. But aside from the recall issue, what else do you want to hear from CEO John Foley during this earnings call tonight?

RON JOSEY: Yeah, no, I think we'll be listening for, of course, demand and any impacts whatsoever with the recall, to your point, but then also just delivery times. Remember, they're investing $100 million over the next six months or so to bring these order to delivery times down to two to four weeks. And so we're looking for insights on that. We're looking for insights on content and maybe the newer businesses around, you know, going into either the corporate or the wellness with their acquisition of [INAUDIBLE]. The last thing I would just say is they announced the addition of Australia here later this year, and so more information around international and where the company could expand to, all of which just make the addressable market that much larger.

SEANA SMITH: Ron Josey, always great to get your perspective. JMP's managing director, thanks so much for taking the time to talk to us today.