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Analyst slashes price target on Peloton to $45 a share after brutal quarter

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BMO Managing Director Simeon Siegel joins Yahoo Finance to discuss why he decided to cut the price target for Peloton, how Peloton lowering the price on its bike is a reaction to the growing competition, and the insider selling going on within the company.

Video Transcript

[MUSIC PLAYING]

MYLES UDLAND: All right, welcome back to Yahoo Finance Live on this Monday morning. Well, on Friday we had everybody focused on the Jackson Hole Economic Symposium but as we discussed in the first hour of Friday's program, Peloton shares were really the big stock market story. We saw that stock under a lot of pressure following the company's quarterly report Thursday after the close. And the real headline, Peloton coming out and cutting the price of its bike by $400.

Joining us now to talk about this is Simeon Siegel, an analyst with BMO Capital Markets. Simeon, you cut your price target on the stock, you've got $45 per share, underperform rating. Let's start with the contention, the central contention for management on the call, which is that cutting the price of the bike is a move of strength. The market seems to disagree. How are you taking that?

SIMEON SIEGEL: Hey, guys. Always good to chat. So listen, I think if an apparel company came out and announced they were cutting the price of their sweaters by 40% because they wanted to sell more sweaters, I don't think there would be much contention. So it's interesting that when we look at this brand that has now cut its price a few times but it's cutting a price on something that arguably is a luxury good. And to Peloton's credit, they've done a great job at using financing to reduce the price in general, it seems like it has to be that they are responding to competition.

And we've spoken about, I talk to you guys all the time about this, the rising competition across connected fitness, there are so many new players that didn't exist last year. So I think-- and we can talk about Peloton for a very long time, their pros and their cons, they've done a lot of great things. But I think if we simplify this down, when a company does not have competition, they don't spend money on advertising and they don't discount. When competition arises, in response you raise your marketing dollars and you lower your price, you raise your discounts. And that's what's happening.

And let's also not pretend like the companies that they are now promoting against are just going to fold and go away. This is where price wars start. And I think the same way that Peloton cut their prices, presumably reasonable to assume that the lower-priced bikes are now going to have to do that as well.

BRIAN SOZZI: Simeon, so a $45 price target on Peloton. That's almost a more than 50% decline from current levels. Take us through some of your assumptions, if the stock were to hit $45 a share is that bike they just cut to $1,495, will have they have cut it to $500? What are you looking for here?

SIMEON SIEGEL: Yeah, so here's the great question, even the way you're asking the question is interesting and important, arguably, Peloton's stock is priced on the subscription value, not on the equipment sales. The problem with that is when 70% to 80% of your total revenues are based on the equipment sales. It doesn't add up.

So what's so interesting is my $45 price target, which I know seems so outlandish but if you just look at the numbers, what it's based on is paying around one times equipment sales, which is what investors pay for equipment one-time in nature purchases and then it's still a high single-digit, it's a nine times revenue on the subscription. That's not cheap. That number gets me to 45.

So the interesting part here is at the end of the day, last week before this earnings number came out before the price cut came out, the company had told investors last year at their analyst day that there was a 15 million household SAM, serviceable addressable market. So 15 million subscriptions they were expecting to get. And 20 million units they were expecting to sell. That was at the pre-cut price.

So the question we have to ask is if we're looking at this business right now that believes they could sell another-- they're at 2 million-ish right now. So if they believe they could sell another 18 million total units some portion of those are going to be the original bike. Why would they have to cut the price now, there's still such a long runway?

So the interesting thing within my $45 price target is it's basically saying, let's figure out how many units you're going to sell is a conversation we're going to have to plug in. But what you're going to pay for them you now have to evaluate. And what happens now for everyone looking at that LTV, did the lower-priced bike extend the subscription like you wanted? Or did it contract it or protract it? Or gives you neither?

Either way, it just essentially took off 10 months of subscription. That's what $400 is. So you took off almost a full year worth of your lifetime value. So the question is, do you believe that lifetime value is going to be three years, five years, or maybe more?

That's where I think the real debate comes in between the bulls and bears. But at the end of the day, what we did see was a company that took, call it 10 months off their lifetime value there. And that subscription revenue, that's what people are paying for.

BRIAN SOZZI: Simeon, what we're also seeing, and this is something you flagged to me, is a lot of insider selling by the executives at Peloton. How big a red flag is that to you?

SIMEON SIEGEL: It's interesting, there's a lot of insider selling across a lot of companies. But I think when the order of magnitude the reality is this looks like it's something beyond simply looking for liquidity when the number we're talking about is over half a billion dollars in the last year. So some of them are 10b-5s, so they're prearranged sales but that's still a decision being made to sell that stock.

So it's the type of thing that can happen. Listen, it's been going up. They've been-- certain insiders have been selling on the way up, certain insiders started selling actually pretty well-timed but it's the type of thing where if you're an investor, you're literally buying what management is selling. So you do have to take that as a piece of the mosaic.

I don't know that that's ever the reason to say insiders are selling, therefore the story is over. But I think that when compounding with all the different flags that you are seeing, it's a hard story not to ignore. And again, you and I talk about this all the time, it's a great product and we recommend the bike especially at $1,400. But the shares, the market cap, to think that this is in the scale and working towards the scale of the FAANG stocks, it's a very different context.

MYLES UDLAND: And Simeon, on that point about the bikes and just about fitness, you have a little bit of a comment on this in your note but I'd love to talk more about like the modalities as the fitness nerds would say, right? Basically what people are doing when they exercise and the way that those change over time. Certainly, Peloton rode this availability in the home and maybe cycling was under-penetrated, SoulCycle, Flywheel might have suggested that five or 10 years ago.

But you noted that Peloton's seeing a lot of work in its strength part of its subscription business and that's a different business. They don't sell squat racks, they don't sell barbells, right? And so it's you know, things are changing for them and I'm curious how you see just like the general fitness landscape, what do people want to do now that we're getting past maybe the cycling boom of the last decade or so?

SIMEON SIEGEL: Myles, such a great point. One comment, one metric that went so underappreciated was the fact that digital subscribers declined this quarter. Quarter over quarter, they had less members using the app. The app is supposed to be a feeder for the all-access. But at the end of the day, if we're talking about an argument where we're going to grow to 15 million, 20 million, 100 million, it's very early for the digital app to see a decline. The digital app saw a quarter-over-quarter decline one time before, fourth quarter of '19. You know what happened in 1Q of '20? They lowered the price of the digital app.

So I think this idea of defense and offense, it's so interesting that when you see a decline in the subscribers in the digital app, the following quarter two years ago they lowered the price of the digital app, this quarter they lowered the price of the bike. So I think that what is important here-- and by the way, I love the app. I think the app has all of their content but this notion of they gave a speaking to the shift in terms of which classes are growing, it's the four classes, it's the strength classes, a member can get access to those classes for $12.99 a month rather than the $39 a month. So all of a sudden, you have an ability, you have essentially kind of the access to this amazing content, which they have, that you don't need to pay the $40 and you don't need to buy their equipment. That's a very interesting conversation in and of itself.

So they call that seasonality related to 4Q but again quarter over quarter and year over year, it's important to look at these numbers and wonder how early we are in this schedule. But I think this idea of people want more to your point, is absolutely the case. And you have a lot of companies, we've talked about the fact that my team put together an 80-page connected fitness primer. The fact-- the most astonishing factor is that could lead to companies that could fill 80 pages already. These companies didn't even exist over the last two years.

So whether it's strength and you see atonal, whether it's a rower, you see a hydro, whether it's a climber, you see climber, there's all these different modalities that are popping up and figuring out is there going to be consolidation, where are they going to go, et cetera is a little bit less the question you're asking me. The point you're saying is Peloton did a beautiful job opening up the floodgates for at-home fitness and connected fitness. That's just the beginning but that also means it's just the beginning of competition and there will be a lot of winners in this category.

BRIAN SOZZI: Simeon, we were very excited to talk to you about Peloton but I opened my email this morning and you just initiated coverage on Traeger and Weber, the two main grill makers in the country, and just listening to you it sounds as though Traeger has changed your meat grilling life?

SIMEON SIEGEL: By the way, not as crazy of a segue as it sounds. I think the grills and connected grills are a very similar parallel. And this was not planned but very similar parallel to the connected fitness. Here you have established, Weber is a phenomenal brand, Weber has tremendous diversification, regional product, et cetera. And then Traeger comes along with a very unique, very specified modality. They're doing wood pellet grills which is growing beautifully, we can use a lot of different puns.

And what is happening here is they're so lowly penetrated in terms of market share, 3% of the household grills, with such a phenomenal runway, that the reality is, I see a lot of similarities between Traeger, what they're doing right now and what Peloton did very early on. And I think that you have, what Traeger does do so well is this app, the sense of community, the sense of engagement, where they take someone like me who had no skills in grilling and all of a sudden, make you feel like you're a master because you press a button and you-- your kids look at you as a hero for the brisket that pops out 16 hours later.

So I think there are a lot of very interesting-- the strengths of Peloton, the community aspect that they were able to clearly foster, I see a lot of parallels in terms of where Traeger can take this. And I think the reality is if you look at a map of their household penetration of the US, they're missing basically the entire right-side of the country. That's a good thing. That's a lot of low-hanging fruit.

MYLES UDLAND: All right, we'll leave it there, Simeon. You and I can get together out here in Jersey, you'll cook the Traeger, I'll break out my Weber. You get us on the connected fitness Peleton, you come over we'll get the Rogue barbell in the garage and we'll will cover our bases here. Simeon Siegel, BMO, always fun to have you on. Simeon, I know we'll talk soon. Have a great week.

SIMEON SIEGEL: Chat later, guys.