Analysts See Peloton Taking Off Even After States Lift Stay-At-Home Orders

Peloton Interactive Inc PTON recorded mixed first-quarter results with its 20-cent loss just shy of 18-cent loss forecasts and its $524.6 million sales exceeding estimates of $485.4 million.

“Notably, PTON was able to beat expectations despite pausing advertising spend,” Rosenblatt analyst Bernie McTernan wrote in a note. “This should drive adjusted EBITDA positive for FY'20E for the first time and greatly improves net customer acquisition costs providing optionality to be more aggressive with their better, best strategy and introduce lower priced products.”

The fitness company also issued full-year sales guidance between $1.72 billion and $1.74 billion — much higher than the Street’s $1.56 billion projection.

Bank of America said the beat and raise “highlighted the inherent gross margin leverage in the model.”

Coronavirus Tailwinds

Peloton also reported 94% growth in connected fitness subscribers and 64% growth in paid digital subscribers. UBS attributed the demand largely to stay-at-home restrictions.

“The disruptive elements of connected fitness, hardware and an array of digital fitness options led to an outsized adoption curve as consumers shelter in place in the new environment,” analysts Eric Sheridan and Alexandra Steiger wrote.

Peloton’s June guidance suggests continued revenue growth in the second quarter. Bank of America expects the benefits to linger.

“We see a sustainable demand shift from COVID: for a large percentage of gym users, we think the Peloton experience will be preferable, and limiting exposure to health risks will be one more important driver for behavior change over the next five years,” analysts Justin Post and Joanna Zhao wrote.

Rosenblatt anticipates a high retention rate even after states reopen gyms.

Kinks In The System

The rise in orders revealed some vulnerabilities in Peloton’s supply chain.

“The key yellow flags, in our opinion, were minor hiccups in PTON's supply chain which have led to delays in shipments amidst overwhelming demand over the past eight weeks,” MKM analyst Rohit Kulkarni wrote, noting that the challenge was a “good problem.”

Kulkarni said efforts to minimize delays could pressure gross margins. Peloton’s new factory should meet future demand surges, according to Bank of America.

New Opportunities

Rosenblatt considers the present environment an opportunity to scale, and MKM forecasts a portfolio expansion in the coming year.

“We think PTON could launch a low-price treadmill and/or a rowing machine over the next 12 months,” Kulkarni wrote. “Management might choose to pause this launch until we arrive at the ‘new normal.’”

The PTON Ratings

Peloton poised to profit from hardware sales with affordable financing, a subscription model that lowers churn, and the community connection that it creates, according to UBS.

“With some of the longstanding bear concerns (NT-term competitive headwinds, consumer affinity for boutique and gym memberships and the medium term TAM for in-home fitness) abating in a COVID-19 world, we see PTON poised to continue to capitalize on this collection of consumer behavior to produce better than expected results in the coming quarters,” Sheridan and Steiger wrote.

Needham's Laura Martin anticipate cost savings related to COVID-19, including extremely low marketing costs, drops in commercial real estate rental fees for future equipment showrooms, prolonged facility life due to remote work, an increase in bike installations that that accelerate movement down the cost-curve, and a widened lead over rivals that lowers customer acquisition costs.

• Bank of America maintained a Buy rating and raised its price target from $41 to $48;
• MKM maintained a Neutral rating but raised its target from $28 to $36;
• Needham maintained a Buy rating and raised its target from $40 to $50;
• Rosenblatt maintained a Buy rating and raised its target from $42 to $56; and
• UBS maintained a Buy rating and raised its target from $40 to $48.

MKM stood alone in its ambivalence: “We are still unsure whether what's happened in the past eight weeks will redefine consumer behavior in 2021 or beyond."

Peloton's stock traded higher by 13% to $43.22 per share at time of publication.