Editor's Note: Our Retail analyst Brian McGough added Peloton (PTON) as a "Best Idea" short on 2/07/20. If you are an institutional investor interested in accessing McGough's research email email@example.com
WHAT Mcgough WROTE YESTERDAY:
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.
WHAT MCGOUGH WROTE ON 12/12/19 OUTLINING SOME OF HIS CONCERNS:
Peloton (PTON) carries a valuation that we think defies both logic and math. The company’s product portfolio continues to expand beyond the core competencies of the company and outside of the successful engaging experience of streaming home spinning classes. We think that will prove to be a huge detriment to margins over the long term.
The CFO’s own key metrics show that the current strategy is built only to add subs/revenue while growing the “TAM” for overly optimistic investors with no regard for the profit profile or return on capital. Simply put the company’s planned future scale won’t be there, and with much less of the cost structure being leverageable than the company is signaling, equity value is being drastically over estimated.