PTON reports Wednesday after the close.
To start, we’d like to quickly address the headline from a couple weeks back where Bloomberg stated "Peloton now has more than 2M members worldwide". Members are not subscribers, and the 2mm number was not new as the headline seemed to imply but rather the number was reported on the 2Q earnings print Feb 5th. We suspect this number will be updated on the 3Q print and given the increase in interest and the 90day digital only free trial, should be much higher.
For our note on this subject PTON | Headline Headfake CLICK HERE
Next, we don’t see this 3Q event as a catalyst for the short. One of the main reasons for this being there is too much of the narrative, whether bullish or bearish, that won’t be in the reported numbers.
This is the March end Q, which we and consensus already thought would be a great quarter for bike sales and connected fitness growth (we’re ahead of the street on both) as the brand was coming off of peak awareness in December and January is the big fitness selling month.
The impact of COVID-19, whether that be new demand or potential churn risk, shouldn’t be visible in the numbers until the 4Q print which probably won’t be until August. Outsized interest in Peloton started around mid-March. Bike revenue isn’t recognized until delivery, which takes a couple weeks at least, and subscriptions are turned on when the customer starts using the bike. So any incremental demand from gym closures and social distancing would be booked in 4Q. There may have been some late March cancellations on macro concerns, but we’re not so sure there was enough time there to make a material impact.
We will get an updated digital only subscriber number which will reflect additions since the price cut and 30 day free trial offer in December. However the change to a 90day free trial in mid March may yet again skew the trend as any additions/trialers after that change won’t be in the 3Q number. Still this metric needs to see a significant ramp for there to be any validity behind digital only as a part of the long term bull thesis.
Management should give updated guidance, as it has not announced pulling guidance, and there will likely plenty of bullish data points to share on interest and engagement. So things will probably sound bullish on the event whether 4Q ultimately tracks well or not.
The next few quarters for PTON are going to be critical for identifying what this company really is for the long term. There is clearly incremental interest in the offering today, but we don’t yet know for sure what that will mean in terms of the long term cash flow profile of PTON.
What happens when we lap all of this? Will growth continue, or come to a halt? Will people turn off when their gym has re-opened?
The street numbers still make little sense to us in this context. Street numbers indicate 943k connected fitness subs at year end for 84% growth, then growth slows to 59% for 1.5mm subs. That seems fine at first glance, but with brand awareness having spiked to levels about as high as they can go in late 2019 to early 2020, and an unprecedented catalyst of nationwide gym closures as a conversion catalyst, why would PTON add more NET new subs in 2021 and 2022 as it did/will in 2020? Perhaps the 2020 estimate is low, but we struggle with how this won’t be the peak year for adoption (core to our short thesis all along), especially given our negative view on the marginal consumer’s economic situation in the next couple years.
Our stance on Peloton’s Tail opportunity is outlined in our black books (links below), and given what we see today, that remains bearish. We’re less bearish on the Trend duration than a couple months ago given the uncertainty around enhanced interest yet coupled with crashing consumer sentiment and an unknown timeline of working out away from fitness centers. We’ll be continuing the research on these near term trends to assess when is the time to get louder on the short, or to pull the plug if the fundamentals tell us we are wrong.
Original Short Black Book from December 2019: CLICK HERE
Black Book from March 2020: CLICK HERE
