U.S. Markets close in 5 hrs 25 mins
  • Oops!
    Something went wrong.
    Please try again later.

Analyst on Peloton downgrade: ‘They can’t be a one-trick pony’

In this article:
  • Oops!
    Something went wrong.
    Please try again later.

Wedbush has downgraded Peloton to neutral. Wedbush Managing Director James Hardiman joins Yahoo Finance Live to discuss.

Video Transcript

- Shares of Peloton are trading lower today by about 4%, and that's after a downgrade by Wedbush to neutral. Basically taking a pause here from what has been a hot time for Peloton, as we know. James Hardiman is with us now. He is the Wedbush Managing Director who's behind that downgrade. James, it's good to see you.

And so your note to me did have this sort of air of a pause, right? That it has been in this hot growth streak. Now things are opening back up again, and maybe there's just going to be less demand for Pelotons. It's not something that is just going to be up and to the right forever. Is that a proper read of it?

JAMES HARDIMAN: I think that's fair. And thanks for having me on. I mean, look, this is a stock that's up four-fold plus since the beginning of the pandemic. I think, in a lot of ways, if you were going to buy a Peloton bike, the last year and a half has been a golden opportunity to do so. It doesn't mean they can't continue to grow.

But I do think we are in the beginnings of a transition phase where they couldn't help but sell as many bikes as they could possibly make, right? Because people didn't have other options with respect to their workouts. To a place where, you know, they have to really market their products. They can't have some of the unforced errors that we've seen over the course of the last couple of years.

And they're going to have to innovate. They can't be a one trick pony with just a bike. I think they're going to have to have some success with incremental products.

None of those things are a foregone conclusion. All of those things could lead to significant upside versus where we are today. But from where we sit, those are unknowns. And to your point, it makes sense to take a pause.

- And I want to dig into those in a second. But first of all, just taking a step back, you got some various data points as to what is the evidence? I mean, it's sort of intuitive that we might see Peloton slow. What are the various data points you're looking at that are evidence to that case?

JAMES HARDIMAN: So we look at about a half dozen data points that we've been tracking for the last couple of years. There's a couple that are very specific to Peloton challenges, they call them, right? The more classes you take, the more miles you log on the bike. And those are certainly, while still up year over year, have decelerated dramatically. And if you were to adjust them for the number of users that are on the platform, which is up 2X year over year, would seem to suggest that the average person is using their bike less. And you would expect that, to some degree, seasonally, as we work our way into the summer. But these are the types of metrics that defied gravity for such a long time with Peloton.

The other data points that we track are social media, so Instagram, Twitter, Facebook likes and follows. Those are also, while up year over year, have slowed down pretty dramatically.

- And James, something else I wonder about that has been less of part of the conversation with Peloton is the premium nature of the product. In other words, how much it costs. This is not a cheap product, as we know. And so I wonder, sort of, what the total adjustable market is for them specifically at this price level.

And whether, as we come out of the pandemic as well, people are reallocating how they're spending their money, right? They're traveling. They're going out more. Maybe they're not going to set aside, how much are these, are the bikes? What, two grand, four grand, I guess, depending on what bike you get.

JAMES HARDIMAN: Yeah. I mean, that's right. It's always been a premium price product. The company has always tried to sort of readjust the conversation in the context of, what are you paying on a monthly basis? And they've gotten that monthly payment to be fairly low with no interest loans over a multi-year period.

But if we just think on a relative basis, I think it's safe to say that whatever you would have been willing to pay for this type of a product in the midst of a pandemic, maybe the value proposition is at least a little bit less today. Because A, there are a lot more in-gym options, right? In-person options that maybe you used to use, you weren't able to use, and now you're able to use again.

But then also, I think what's underappreciated-- and I don't think anybody is going to dethrone Peloton any time soon-- but there are more at home options than they have ever been, probably times 10. And so competing is maybe a strong word, but there is more competition in the home space than there's ever been. And which, again, leads to that pricing power question.

- And just finally, quickly, I want to ask you about new products, right? Because obviously, there was the issue with the Tread. If you're like me, you're never going to be a bike person. And so what are your expectations for other products for them, and how many more customers that could bring in?

JAMES HARDIMAN: I mean, look. What was so attractive about the treadmill market from the very beginning is take Peloton out of the equation. The market size is two to three times the size of the exercise bike market. Now their first product, the Tread+, Plus, a $4,000 treadmill, was way too expensive. But a big part of my growth thesis for some time now has been this cheaper Tread that they began to roll out earlier this year, and then the Tread+, if you remember, had the major safety issues.

My biggest concern on that front is that people don't know the difference between the two. Right? The Tread+ never really amounted to much, barely was material to their numbers. And certainly the stock. The cheaper Tread, which has not had these major safety issues, is what I think is truly important to the story. But you can do your own research and ask people if they know the difference between the two. And I think the answer is maybe a little bit concerning.

So I think Peloton has a tough but important job ahead of them. And that is to, A, convince people that their products are safe in general. But that this new treadmill that they're rolling out is not the one that had those issues if they are to sort of save that significant source of upside for the company in the stock.