Peloton: From $50 Billion To $25 Billion

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Friends,

Leading fitness equipment and media company Peloton reported Q3 2021 earnings yesterday, continuing their pandemic-led surge in new business.

Here are the details (Source):

• Q3 total revenue grew 141% to $1.2 billion

• Connected Fitness Subscriptions grew 135% to over 2.08 million in Q3

• Digital Subscriptions grew 404% to approximately 891,000 in Q3

• Total members grew to over 5.4 million in Q3

Based on the positive results, Peloton watched its stock rise about 5% in after-hours trading.

The bad news?

Their stock was absolutely crushed last quarter.

After hitting an all-time high of $170 per share in January, Peloton has seen its stock drop 50% in the 3-4 months since — closing at $82 per share earlier this week.

That’s a ~50% drop and erases the majority of their pandemic-led gains.

We all know the Peloton story by now. They can’t sell equipment fast enough. Subscriber growth continues to compound aggressively. Their apparel line is quietly becoming a legitimate business, and monthly churn is sitting at an absurdly low level. That’s the good news.

But two main issues have caused Peloton’s stock to crater over the last few months:

1. Supply chain constraints

2. The Tread+ recall

When it comes to supply chain constraints, that issue is rather straightforward. With hundreds of millions of people across the world quickly shifting to at-home workouts last year, Peloton saw a massive uptick in demand. That’s great, but they weren’t prepared for it logistically.

Just as Peloton watched overall demand & revenue skyrocket, its customers saw a similar trajectory for wait times. Before the pandemic, new customers received their equipment within weeks. After the pandemic began, they were waiting months.

Remember, not only does the expensive nature of a Peloton inherently increase a customer’s eagerness to get the product, but with the uncertainty of when pandemic-enforced stay-at-home orders might drop, that eagerness seemed to compound subconsciously.

After watching wait times extend for months, Peloton decided to step up last quarter. They announced plans to invest $100 million in expedited air and ocean freight to help speed shipments. They also completed a $420 million acquisition of the manufacturer Precor, which will help them expand their product offering and provide 625,000-sq-ft of manufacturing capacity in the United States.

The result?

Peloton says average wait times have now returned to pre-pandemic levels.

Next up, the Tread+ recall.

Following pressure from the Consumer Product Safety Commission after one child died and dozens were injured in accidents involving the Tread+ machine, Peloton decided to recall all of its treadmills, halt sales on existing models, and waive customer membership fees for at least three months.

In total, they project it will cost the company an estimated $165 million next quarter — reducing their expected 4th quarter sales from $1.12 billion to $915 billion.

That’s not great, but to be fair, it appears to be less of a blow than analysts originally expected — with the stock jumping ~5% after hearing CEO John Foley’s explanation on the earnings call.

Also, it doesn’t hurt that bikes still represent the overwhelming majority of Peloton’s business.

It’s often easy to forget that Peloton is attempting to change the world, shifting consumer interests from traditional brick-and-mortar gyms to interactive at-home workouts. No one said it would be easy, and it hasn’t, but ultimately, I still believe they are executing extremely well.

With a $0 down and 0% APR financing program introduced last year, Peloton’s equipment is now more affordable than ever. For example, almost 50% of Peloton bikes sold in 2020 were sold to households with less than $100K in income.

Combine that with the fact that Peloton just hit a record-low monthly churn of .31%, despite almost 95% of its customers being on traditionally high-churn month-to-month membership plans, and it’s easy to see why so many people have remained bullish on the companies future.

We’ll see how sales trend as stay-at-home orders continue to be relaxed globally, but I assume investors that liked Peloton at a $50 billion market cap most likely love it at a $25 billion market cap :)

Have a great weekend, and we’ll talk on Monday.

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