Peloton's Record $1 Billion Quarter

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Friends,

Peloton, the leading fitness equipment and media company, reported earnings on February 4th, continuing their pandemic-led surge in new business.

Here’s a high-level overview of the financials (Source):

• Peloton reported $1 billion in revenue, up from $466 million a year earlier

• Earnings per share came in at 18 cents vs. expectations of 9 cents

If you want more financial highlights and Q3 guidance, this slide is taken straight from Peloton’s investor deck:

With revenue up more than 125% and the luxury fitness membership community reporting their first billion-dollar quarter, their stock must have exploded — right?

Not exactly.

After ending the day up over 7%, Peloton fell more than 6% in after-hours trading due to the continuous impact of supply chain constraints.

The good news?

$PTON is still up nearly 500% in the last year alone.

Today we’ll dig through the highlights, lowlights, and everything in between from Peloton’s quarterly update.

As always, let me clarify:

I’m not an equity analyst, and it would be foolish to buy stocks based on my opinion alone, but here are a few things I thought were interesting :)

Let’s start with subscriber growth.

Peloton ended Q2 with more than 1.6M connected fitness subscribers, otherwise known as users that pay $39/month to sync workout classes directly to their Peloton equipment, which was up 134% from the prior year.

In total, when you add in cheaper digital subscriptions — think memberships that don’t require a Peloton device — the fitness equipment manufacturer has more than 2.2M subscribers in total.

The result?

Record revenue growth.

Check this out…

Peloton Revenue

Q3 2019: $316 million

Q4 2019: $223 million

Q1 2020: $228 million

Then, the COVID-19 pandemic hit, causing gyms worldwide to close and consumers to flock toward at-home fitness equipment that provides a membership community experience.

Q2 2020: $466 million

Q3 2020: $524 million

Q4 2020: $607 million

Q1 2021: $757 million

Q2 2021: $1.06 billion

For the more visually inclined, here’s the revenue chart again:

While Peloton’s top-line revenue growth is certainly an impressive indication of their ability to capitalize on the shifting fitness landscape, I’m actually more focused on the addiction component.

After peaking at almost 25 workouts per month, the average Peloton user is still completing about 21 workouts per month — up from just 12 a year prior.

With most people still working from home, the pandemic has obviously played a part, but don’t discount the value-add of additional features like strength workouts, boot camp, and yoga as contributing factors.

Regardless, as we move closer to a post-pandemic world, while most suggest that these numbers will decline steeply, I’m not so sure.

Peloton has proven that their membership community acts more like a cult than a traditional fitness club.

Don’t forget; addictions are hard to break.

Peloton has also made progress on the music front, announcing the creation of original music and a partnership with Beyonce, which drove over 1 million workouts during 7 live classes last quarter, but the remainder of Peloton’s bull case revolves around two items:

• Low Churn

• Affordability

Here’s what I wrote about Peloton’s churn rate a few months back.

The most impressive part?

Over 95% of Peloton’s Connected Fitness Subscriptions are on month-to-month payment plans, which, traditionally, once the hardware is paid off, would give them an even greater ability to churn.

So far, they aren’t.

Here’s how their monthly churn rate has trended over time:

With low monthly churn, Peloton’s main focus over the past year has been increasing the affordability of their “luxury” fitness equipment.

Peloton introduced financing with Affirm last year, enabling a customer to buy their equipment with $0 down and 0% APR. The results have been fantastic.

Here’s a shocking statistic:

Almost 50% of Peloton bikes sold in 2020 were sold to households with less than $100K in income.

The unique combination of low churn, additional class options like strength and yoga, and increased affordability will be a superpower for Peloton going forward.

So, with record revenue, outsized subscriber growth, insanely low monthly churn, and increasing affordability, why did Peloton’s stock drop 6% after the announcement?

Peloton still can’t keep up with demand.

For those of you who aren’t already aware, since COVID-19 lockdowns began last year, Peloton’s supply chain has struggled to keep up with the surge in demand — causing some customers that ordered equipment in October to still be empty-handed four months later.

Last quarter, Peloton CEO John Foley announced various initiatives to help, including increasing manufacturing capacity overseas, expediting shipping through ocean and ground logistics, increased investment in customer support, and more.

The only problem?

Due to the investment, gross margins declined from 43% to 39%, but wait times haven’t improved.

Now, Peloton is doubling down.

First, they acquired commercial fitness manufacturer Precor last quarter for $420M. The deal will provide 100+ additional engineers and allow Peloton to infiltrate hotel, university, and corporate gyms in 90 countries worldwide.

But more importantly, it also provides them with 625,000 sqft of additional warehouse capacity in the United States, which is a huge value-add given all their current manufacturing capacity is overseas.

Secondly, CEO John Foley also announced an additional investment of more than $100M to continue with expedited shipping across air, ground, and sea for the next 6 months.

The result?

“This investment will dampen our near-term profitability,” Foley says.

Ultimately, that’s what caused the equity decline.

My take?

They’ll be fine.

Sure, I’d love to see Peloton maximize earnings while demand is at record levels, but in my opinion, they’re still executing their gameplan.

The community they’ve built is a cult. Their products are more affordable than ever, and with the $420M acquisition of Precor, they’ve outlined their strategy for global & commercial expansion.

With a 10-year goal of 100M subscribers, they now have a clean, clear, and detailed plan in place to accomplish it.

For me, that’s the important part.

Have a great day, and we’ll talk tomorrow.

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