The consensus set up was that “PTON is gonna crush the quarter” – and that it did – but not as much as we think was broadly expected (at least that’s what the negative stock reaction is telling us) despite all the hype and energy that surrounded the conference call. There were puts and takes on the numbers, but overall this event did nothing to alter our view that the company is building a bigger infrastructure with higher fixed costs than the true addressable market can ultimately sustain. The core cycling business is solid, but PTON is building for far more than what’s now the core. If it were to focus its capital and resources towards the core we value the company at $2-4bn (table below), capital dedicated to other businesses including digital only we see as destructive to long term equity value. Best Idea Short. We should see a big lift in digital subscribers next quarter, which should keep the momentum alive that PTON will yet again beat expectations as it adds users to the ecosystem. We think that’s a gift for current holders to sell at the stock’s current premium valuation when the lockup expiration occurs on February 24th.
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Key Callouts:
Connected Fitness Product Revenue – This beat consensus by 11%, but came in significantly below where we thought it could. Also the company cited better delivery times vs last year implying revenue was pulled forward from FQ3. So with a shift benefit revenue growth slowed 3000bps vs last Q and nearly 1100bps on a 2 year basis. Not awful but net bearish.
Connected Fitness Subscribers Count – This beat consensus by 3%, once again lower than we expected with the increased interest in the name in the holiday period. This should also benefit from the delivery timing noted above. The slowdown was less significant here but still slowed 700bps, and 800bps on the 2 year. Additions slowed as well, still 95% growth in ending sub base is solid, though it was aided by the lower churn. We’ll call this a push.
Churn – This was clearly the most bullish number this print. 0.74% monthly average churn was much better than 0.90% last Q and better than we had expected. It’s still rising YY, but the sequential improvement is definitely bullish. It begs the question what really happened last Q vs this Q to spark that. Management didn’t give specifics beyond “better engagement.” We think there was more to it especially since guidance for next Q is rising churn, but this was definitely a bullish callout.
Digital Only Subs – This number was weak, at 109k subs, up 3200 from last Q. However, given the fact that the free trial period was extended 2 weeks to 30 days, and the big price cut was made around Dec 4th, the number actually tells us nothing for this Q. We suspect we will see a big uptick in additions here in 3Q, if we don’t it’s basically a thesis buster for the bulls. The big bull case we hear is how Peloton will be the leader in fitness content attracting millions upon millions of subs mostly in digital, with those who can afford it on the connected fitness subscription. We don’t think the differentiation of Peloton is such that its app and content can create any real economic value. The company is already signaling that it plans to run digital only at break-even with the plan to convert subs to connected fitness with a sale of equipment. We don’t think the market opportunity in that end number of connected fitness subs is big enough to justify anything near the valuation today.
Competition – Management dismissed the risk from competition of bikes where the Peloton app could be used, stating that if they are brought into the Peloton environment, they will convert to a Peloton bike. We think that is unlikely if they already bought a competing bike. Competition for the connected bike with streaming is growing rapidly, and it will be a race to see who can eat up the market as switching costs are high. Those who are avid indoor cyclers and can afford to switch are likely already Peloton subs, so the risk is that they switch to a superior offering that might come along.
Digital Only Sharing – The CFO noted twice on the call that digital only subscriptions are for one user only. Is it just us or is that comment somewhat removed from reality? Do they really expect people in a household not to share the subscription? She is saying this to try to rationalize the price difference for listeners vs the $39 connected fitness subscription. We however think there is no reason to rationalize the price difference. A Connected Fitness Subscription involves a connected device that tracks your results, builds in competition with others in the class, and is highly engaging. We think that is worth much more than a digital only product that can be replicated by hopping on YouTube or getting a Beachbody sub for $99/yr.
