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Bull vs. Bear: Can Peloton turn things around?

Needham & Company Managing Director Bernie McTernan and New Constructs CEO David Trainer join Yahoo Finance Live to discuss Peloton earnings, growth strategies, cost-cutting measures, and the outlook for leadership.

Video Transcript

BRAD SMITH: Let's battle it out in our bull versus bear segment for the week with the spotlight on Peloton. Shares of PTON hitting a new 52-week intraday low. This as we're continuing to see a broader move lower in the stock and the shares. New Constructs CEO David Trainer thinks the stock could decline to $0. And Needham and Company managing director Bernie McTernan, who maintains his buy rating, join us now to make their cases.

All right, so David the bear, Bernie the bull. First, Bernie, I got to talk to you as we kind of kick things off here on the day, as I'm looking through some of the new news that has come out. Peloton is going to be partnering with Dick's Sporting Goods. This gives them kind of a physical IRL partnership to add on to what they had already done with Amazon for the e-commerce partnership. Does this make a difference?

BERNIE MCTERNAN: Yeah, I mean, we'll see. As you mentioned, it is part of their strategy to get into more third party distribution. And that's what the company is trying to do, where they've taken the DTC strategy as far as it can go, at least at this point, especially where end markets are. So some things to re-accelerate growth, those third party channels. We have fitness as a service, certified pre-owned, the push of the digital app, and even more equipments like the rower that should be coming out shortly.

So Peloton clearly in a difficult position. That's a well known. And really, Barry McCarthy has come in and trying to really test and really see what sticks and if there is anything to do to accelerate growth here because I know for us, we barely have any subscriber growth at this point, going over the next 10 years.

So for us, even though that risk-reward is really wide, especially when you're dealing with revenue multiples like a day like this, it really-- there's not really a floor to the downside. That that's the upside risk if they can figure out what to re-accelerate growth while waiting for that market to return.

BRAD SMITH: Well, David, some of the question marks around that growth actually play right into your bear case particularly. And you've also taken a one step further, talking about the products, which are now going to extend even into the new rower as well. They've got the Peloton Guide, of course, the trademark bike, Bike+, and the Tread.

With all of that in mind, you've said that the product is undifferentiated and too expensive. So even if they do have these new partnerships on the commerce front, how do they eventually start to get into new homes or just get more subscribers? It sounds like, though, you believe that this stock just going to 0. They're not going to be able to do that.

DAVID TRAINER: You've got to start with the unit economics. First, they have to produce a product that actually generates a profit. And they're not doing that. So whether or not they sell that over their website, Amazon's website, or in Dick's Sporting Goods stores, it sort of doesn't matter how much you sell a product that doesn't actually generate a profit.

And when I say undifferentiated, I mean as far as I know, their treadmill isn't a magical treadmill that's that different from other treadmills. Their stationary bike is not that different from other stationary bikes. Their content is not that much better than other sources of content for workouts.

Look, we're talking about a workout product. We're not talking about some new workforce automation technology or robots, right? It's workout products. And it's priced as if it's going to continually grow and achieve much better margins than it's ever achieved. And we just don't see it. We don't see a path to that at this point in time.

Meanwhile, the last 12 months, it's burned $2.8 billion in cash. I think they only have around maybe a billion of cash left on the balance sheet. So look, you can do the math. They can't survive much longer without drastically changing the business model or getting new financing, which, in the current environment, is going to be very difficult.

BRAD SMITH: Bernie, do you believe that there is a different business model that Peloton could take on? I mean, they had gotten into the market, not just on the connected device front, but also under this lure for so many fitness enthusiasts that they could access what would otherwise be a boutique fitness experience with more technology from the comfort of their own home.

BERNIE MCTERNAN: Yeah, and I guess I would push back on that. I do think that the content is differentiated. We've done a bunch of different screens, especially like when Apple Fitness+ came out, for example, Peloton is putting out dozens of pieces of content per week, while Apple was doing that on a monthly or bi-monthly basis. What that means is that there's just more choice, meaning you can choose your instructor, you can choose the music, the level of difficulty.

It's really that breadth and depth of content that we think is a big differentiator for Peloton. And that's why we're focused on that subscription revenue that's over a billion now, heading towards 2 billion over time. And it's 70% gross margin. So certainly the products' gross margins is negative right now. We don't have that reaching back to positive territory for a couple of years. And even then, we only have in getting back to 20% gross margin versus the highs in the 40s.

So, again, to us, it comes down to expectations, and we just don't see much being priced in at the stock at these levels for growth or giving the company credit for the $800 million of cost cutting that Barry McCarthy thinks that they're going to do. So we have them getting back to EBITDA profitability in fiscal '24 and don't see them running out of cash.

But I think that the recent price increase they did was important and mainly because the churn dynamics weren't as bad as bears feared, which shows the Peloton does have pricing power. And I think there is an element of affordability when you talk about $44 per month for the household versus if you go to a SoulCycle class, it might be $40 per class. So I think that there is a savings there for the-- especially the high using Peloton subscribers.

BRAD SMITH: And David, I want to give you one more opportunity to jump in the conversation here, especially with regard to the amount of cash that Peloton would need. Let's say, hypothetically, that the churn were to stabilize and perhaps some of the growth would actually be re-energized there among the subscriber base. Then what? How much cash, even with the $800 million in cost savings that they're trying to implement, would they need to raise on the cash front in order to not just weather the near term, but also kind of sustain some of their margin growth and just some of the revenue growth as well?

DAVID TRAINER: Yeah, no, they're absolutely going to need more cash. I mean, they're burning at an alarming clip. And look, the bottom line on content is that it's expensive to produce. I mean, just look at the troubles that Netflix has had, right? People don't realize that Netflix is a terribly cash flow negative business because they capitalize all those content costs. Content is not cheap. Good original content is expensive. So that's not going to save the business.

And you got to keep in mind that margins right now, profit margins are negative 30%. And in our model, when we assume an improvement of that profit margin from negative to almost 2% and then growing revenue at 24% compounded annually for the next eight years, that implies a stock price of around 6 bucks, right? So if you want to talk about what's priced in, there's a lot of really good stuff already priced in.

BRAD SMITH: And David, we got to go very quickly. Do you believe that Peloton gets sold?

DAVID TRAINER: I don't know who would buy them, right? I mean, do you think anyone who's using Peloton doesn't already have an Amazon subscription or buys Nike stuff? I don't really know where the value at is. I mean, we're talking about exercise equipment with-- connected to the internet or to a computer screen. I mean, it doesn't-- I don't see the value add for anyone to buy a Peloton.

BRAD SMITH: All right, and Bernie, just very quickly-- also got to go here. You've got about $14 price target as of right now. Given the declines we're seeing today, any updates, any kind of changes in that guidance?

BERNIE MCTERNAN: No, no [INAUDIBLE] changes in price target changes to talk of right now.

BRAD SMITH: All right. New Constructs CEO David Trainer and Needham and Company managing director Bernie McTernan, thanks so much for joining us here today.