Another stellar quarter from PTON. 2Q metrics beat street estimates on pretty much every item. Revenue growth up 124% (constrained by delivery times). Connected fitness subscribers up 134% yy, just slightly below last quarter at +137%. With sequential net additions up 37% vs last Q. Churn ticked up slightly but that is probably to be expected lapping some big accelerated adds over the last 12 months. Digital subs accelerated to up 473% YY, we suspect this will continue to beat expectations and Digital free trials will draw in customers growing the pool to sell product and subscriptions to.
The after market trading seems to not like the EBITDA guide down as the company is investing $100mm to try to speed up deliveries including expedited shipping, air freight, and diverting away from congested West Coast ports if possible. The backlog continues to grow and the delays are constraining revenue, but more importantly they are making customers impatient. Management is getting tired of being apologetic to customers so it’s doing the right thing in spending up to make them happy. The good news is this is very much an industry problem, so there is minimal share risk in the interim, and this investment in speed alongside the investment in Precor might be a net share tailwind from here.
The other potentially disappointing news is that the new Tread launch in the US is being pushed out until May, this may be a negative for the Peloton product enthusiasts, but we’d argue it's good for the model and the business. There are clear supply chain issues right now driving up costs, demand will be strong for the Tread regardless of launch timing. Pushing out the launch will mean better delivery times, better customer satisfaction, better profitability in satisfying demand, and a more spread out period of strong revenue for the company. Tread probably becomes a hot holiday gift of 2021.
Beyond shipping, the company continues to ramp manufacturing capacity to keep up with demand. The company noted that capacity now exceeds demand, demand has not slowed, but it can now at least avoid sacrificing sales from not being able to get product to the customer in a reasonable time from a manufacturing perspective. Capacity is up over 6x in 12 months. In addition, during the quarter the company announced the Acquisition of Precor which is expected to close in the first half of this year. To be clear, this is both a capacity and a talent acquisition. There’s no product that Precor makes that Peloton cannot otherwise make organically, but Precor brings a long history of expertise in fitness equipment. It adds quality capacity with the bonus that the bulk of Precor’s manufacturing capacity is in the US, which will shorten delivery times once it is up and running. Also, Precor’s ties to the commercial market and salesforce to the gym community is also a big plus for PTON to have another growth channel upon full post covid reopening.
The lift from Covid on Peloton’s business is far from a 1 year bump, and Covid-19's impact on daily life is far from over. Many households will make home fitness solutions a priority for convenience when time is tight and a fallback should another virus of consequence hit the news feed, even if they are people who prefer live classes or gym visits. We think there can be healthy debate as to whether the long term cash flow profile might justify the company valuation at a given moment, but with the momentum in the business that just wont matter for the stock for a long time. Peloton is growing rapidly, there is still significant runway for subscriber growth, extended demand and new product launches will continue to drive top line metrics for the foreseeable future. The March end quarter is likely to be a blowout, between digital only in new peak pandemic case rates, New Year’s resolutions to try to drop the Covid-19(lbs), and accelerated deliveries, we suspect numbers will look very good. TREND to TAIL street numbers look too low to us, and as the Street realizes the real earnings potential, this stock most likely grinds meaningfully higher.
