PTON put up an exceptional quarter by any metric. Sales clocked in at +232%, Connected Fitness Subs up 137% to 1.33mm and Digital Only Subs up 382% to 510k. But you would never know how killer of a quarter it was if you only listened to the conference call. Management started the call sounding very defensive (morbidly so) about its inability to deliver the new Bike+ orders on time. If you ask us, that’s a world class problem to have. We ‘get it’ that it sends a negative message to consumers if management does not acknowledge that there is a logistical problem and simply gloats over stellar end-demand, but it showed its ‘newbie’ status as a public company in what we’d call a botched communication of an otherwise decent problem to have. The reality is that this ecosystem – one that it created singlehandedly -- is on fire. The company continues to churn out new content and new ways to engage its connected fitness subscribers at a record pace – and no one else is even close. When comparing initiatives like Apple Fitness+ to what Peloton has to offer, it’s simply a joke. We were short PTON in the early days (before covid), and officially covered on 9/10 at $84– with every expectation that the stock would continue to grind higher as the trend model was clearly inflecting to bullish. While we have no skin in the game today, we’re inclined to support the stock on weakness. It’s no accident that Planet Fitness missed the quarter within minutes of PTON blowing away the consensus. This home-connected fitness trend is here to stay – even if and when we have a vaccine – and PTON has a first mover advantage gap that simply cannot be closed unless it lets up on the SG&A and capex lines, which aren’t happening.
Two specific elements of the quarter stood out to us.
- First is Digital Only success. Paid Digital Subs were up 382% to 510k. Though that is still less than half the connected fitness sub base, we think in order to believe in the big bull case for PTON, digital only has to play a role in adding large volumes of subs. This quarter that was clearly the case as free trialers converted at a solid rate. We can’t underscore how important this is to the big call in buying PTON here.
- Second is the delivery delays. Sure, for now it’s viewed as a flub and a shipping cost pressure, but the biggest challenge for the financial model continuing its momentum over a multi-year time period is PTON’s reliance on product sales to keep the revenue engine going until the sub base scales materially. The long delivery times is actually spreading out the demand over a longer time period and moderates that problem as opposed to facing huge single quarter of half compares. The commentary on the new lower priced tread seemed to imply management expects a similar challenge to keep up with demand. The longer the company can spread out this clear demand surge, the better the revenue model will look for the foreseeable future.
