Peloton earnings: ‘There’s a lot of value’ to what the company is doing, analyst says
Citi Internet Sector Senior Analyst Ron Josey joins Yahoo Finance Live to assess Peloton's reported Q3 earnings miss, subscriber growth, pricing on subscription services and equipment, and the company's hardware and content.
Video Transcript
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SEANA SMITH: Let's take a look at Peloton. The stock is sinking as losses mount for the company and sales take a hit. Now the company reporting a wider than expected loss on revenue of $964 million. That missed the Street's expectations as a result of shares falling today to an all-time low. We want to talk about what we heard from the company. And for that, we want to bring in Ron Josey. He's Citi's senior analyst of the internet sector.
Ron, it's great to have you. I know you've been bullish of Peloton in the past. Some concerning numbers out from the company in its most recent earnings report. CEO Barry McCarthy saying this morning that he was surprised at how deep some of the issues are with Peloton. Has it made you maybe rethink that bullish stance that you have had on the company now for some time?
RON JOSEY: Yeah, I know. It's a great question. Thanks for having me. I mean our bullish stance is based on a few things. But the first, most important thing for us is on the subscriber side. So it's knowing that they're adding subscribers, that engagement is improving. I think on average, what the average member works out with Peloton about 19 times a month. And so from a product market fit perspective, it seems like they have everything. We knew it would be a messy first quarter. It was a management change, a lot of different changes going on around pricing, around go to market, marketing, et cetera.
And so our hope, our view here and our thesis is that every quarter as we move forward with new management and new approach to pricing, things get better incrementally every quarter. And so our overall bullish view is around the product just having a great fit with their product, with their consumers, and having that continue going forward. And then if that continues, then we think that opens up a lot of different avenues for just greater growth over the next several quarters and years.
- And as we've seen, a lot of talk about whether Peloton will sell off some of its business or perhaps be acquired. What do you think this earnings report does for that conversation? And who would be perhaps a good fit If they were to acquire it?
RON JOSEY: Yeah so I mean, look, I think part of the earnings that came out today, they announced a new $750 million, I believe, debt deal. We'll see the terms of that in a few weeks, whenever that's published. But point being is, I think they did have a pretty big net loss on free cash flow for the quarter. With the incremental $750 million that they raised via debt, their balance sheet is certainly shored up so that they can continue doing what they're doing. And they probably didn't want to issue new equity at these levels or things along those lines.
And in terms of acquisitions from other companies, I think there's a slew that are out there, and you can imagine who they are. I think we've spoken about them in the past, some of the largest consumer device manufacturers out there and then some.
But frankly, what Peloton is doing overall in terms of innovating and really defining the call it connected fitness market, and merging both the bike or the hardware with the experience, that's something that not many others are doing at that level and scale. And so in our view, there's a lot of value to what Peloton is doing.
SEANA SMITH: So Ron, building on that, because McCarthy in his shareholder letter, he did say that the app has never been a focal point for the company just in terms of marketing campaigns or growth strategy, kind of alluding to the fact that there will be more focus on that going forward. My question to you is how big of an opportunity, I guess, how big do you think the app part of the business could potentially be?
RON JOSEY: Yeah, so there are a few breaking news on the earnings that came out, right? One is that Peloton is potentially selling on other retailers. One is that they're bringing out-- opening up the platform to other players from a third-party perspective.
To your point on the app, that's exactly right. I think the management talked about it being an underutilized asset or certainly an asset that not many know exist. It has become a very strong top of funnel place for Peloton to drive new subscribers. And so maybe we see more of a freemium offering of the app going forward.
Either way, Peloton's invested so much in the content. And the content is for members to enjoy and use, et cetera. And so if you can sort of layer in that content in acquiring new members, showing them what you can do, even if you don't have the bike-- so running outside, which, as we get in the summer months, that makes sense, or doing workouts or whatever it is on the outside, it's a great way for Peloton to broaden their reach and do so in a way that doesn't require such a large spend up front for the hardware. And so I would think that the digital side is something that is a big growth area.
But for now, it's still underutilized, under-penetrated, I think they have just under a million subscribers overall. And so our focus is primarily on the member base and the selling of the hardware, but it's something that we're watching for sure in terms of where investments going there.
- I've been wondering for years why they hadn't put more of a premium on that app. I've been using the app aside from the bike probably three to one, which is interesting. And to tie those two questions together, you mentioned it being the content. And I've always wondered in terms of an acquisition, a Netflix, an Apple, an Amazon, when will they view Peloton as a content company as much as a hardware-software company?
RON JOSEY: I think if you talk to them, they are incredibly moving towards content and software. And that gets to potentially opening up the product to third parties, third party gyms, or third party fitness instructors to put their content on Peloton. That's something that might come down the pike. And so they've got that core group of users. They've got a tremendous user base that uses it 19 times a month. And so you're exactly right. To expand that usage to the app and to more things, that's the opportunity.
Now, look, it's a tough day to day. I get it. It's been a tough couple-- really since management turnover early in the year and since the fall. But our view here is that the user base continues to grow and be extremely engaged because of the content, and marrying that content with the hardware and the software, to your point.
- So definitely still room to grow there. We do thank you for your insights. Ron Josey there, Citi senior analyst for the internet sector. Thank you so much.
