PTON Guidance

Investment Analysis Clubs Saul’s Investing Discussions
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I don’t have any concerns with the recent quarter, it came in about as I expected. Guidance has me a little concerned. They guided for 1.1B in revenue which is only a 3.2% increase from the previous quarter of 1.065B. Lets assume they beat that and come in at 1.15B, or 8% sequential growth. Since PTON does have seasonality in their sales lets compare that to sequential revenue growth from the 2nd to 3rd quarter each of the past 2 years.

20%…13%…8%

Their 4th quarter is typically their worst quarter so we can expect guidance for the 4th quarter to come in negative. This won’t catch anyone by surprise as it will be expected.

Here is sequential revenue growth in the 4th quarter for the past few years.

-25%…-29%…16% (fueled by the pandemic)…?

Gross Profit Margin continues to decline with guidance for 35%. Here’s the downward trend

48%…43%…40%…35% (guidance)

I absolutely love the company but I’m falling out of love with the stock. I’ll be selling my shares. Here’s hoping PTON can correct their production and delivery issues faster and cheaper than everyone is expecting but that doesn’t feel like the case to me!

-AJ

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Seasonality is not relevant for Peloton now at all because it has extremely large backlog and is still constraint on supply and shipping.

The guidance simply indicates that Peloton does not have much confidence in being able to solve the supply and shipping issue in the next quarter. This is indeed concerning unless they have actionable plans to resolve the issues soon. I’ll need to look into their earning call transcripts to figure that out.

Luffy

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AJ,

You make a good point about growth slowing sequentially so an outsized position is not prudent.

The way i read it, their supply chain and manufacturing base can only handle so much demand and they have to invest to catch up. Part of the problem is a worldwide container shortage and slow uploading times at the ports, so that part is not their fault. Once they hopefully get their lead time and inventory under control over the next few months they will focus on marketing spend which should drive better numbers.

Most of the recent growth has been organic. They have a great problem as i see it, demand is bananas and it takes cash to scale up. Demand has not softened one bit, as they noted on the conference call and with the precor purchase and the treadmill in the pipeline I’m excited. The call was upbeat and by all accounts they are the Apple of fitness. It’s a capital intensive business, so for me, this is par for the course. A factory has a lot of fixed costs and margins must take a hit to move the business forward. I believe they are making the right moves but am content with a 6% stake. Its not SaaS but its one if the best businesses around.

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Howdy AJ,

I’d love to try to talk you out of falling out of love with this great company. I’ll try to clear up a couple things you mentioned.

Their 4th quarter is typically their worst quarter so we can expect guidance for the 4th quarter to come in negative. This won’t catch anyone by surprise as it will be expected.

I can understand why you would think this, but the great thing is we have Peloton’s full year guidance to debunk this theory. This makes me more excited, in fact. Let me explain.

As you mentioned, Peloton guided $1.1B for Q3 however, they also guided for $4.075B for their full year guidance. So given what we know, this would mean their full year revenue would look exactly like this (if forecast were to be 100% accurate, which of course it will not) -


           Q1	            Q2	            Q3	            Q4	            FY
2021	 $757.9 	 $1,064.8 	 $1,100.0 	 $1,152.3 	 $4,075.0

So, we can say with pretty high certainty that Pelotons Q4 sequential revenue will not come in negative. Pretty amazing considering this company usually sees its revenue drop significantly QoQ in Q4 each year. This indicates to me that their back long is STRONG.

Gross Profit Margin continues to decline with guidance for 35%.

Yes, quite right you are. Overall gross margins are trending the wrong direction but this is due to their short-term added shipping cost to help get their new customers their bikes/treads faster. This is a trade off that I think is well worth it. While most are focused on their decreasing overall gross margins, let’s take a look at their subscription gross margins -

 
Sub Gross Margin
         Q1	 Q2	 Q3	 Q4	 FY					
2018	33.6%	50.3%	35.1%	51.1%	43.3%
2019	48.6%	45.6%	25.6%	52.3%	42.7%
2020	56.1%	58.0%	57.8%	56.8%	57.2%
2021	58.5%	60.3%

How about that, we saw an all time high this quarter! Not so shabby now, huh! And, to top things off, CFO Jill Woodworth reinforced the fact that they expect this to be in the 70’s long-term. That might not be Alteryx worthy, but I won’t scoff at reoccurring 70%+ gross margins down the road. Sure, this is a smaller piece of the pie today, but eventually, their subscription revenue will drive this company. This is what I am focusing on.

Hope this helps.

Rex

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I own a business that imports all of our inventory from China, and I can confirm it is a complete and total mess right now.

No containers, sailings being cancelled, California ports are completely overloaded to the point where it is taking an extra 3 weeks to get a container on a truck. I can see why they are turning to air freight in some cases. They really don’t have a choice.

I’m not sure if PTON is affected by this particular issue, but some China provinces are also experiencing electricity restrictions. One of my manufacturers could only operate for so many hours of the day through some of December and all of January. And now China is about to start their New Year holiday which takes all manufacturing offline for at least a few weeks. They have no idea if this will be resolved when factory work resumes.

To top that off, Covid is rearing its ugly head in China again which is causing issues with factory workers. Another one of my manufacturers said they have no idea how many workers will even return after the holiday.

Of course this will all eventually resolve itself, and it is affecting a lot more than PTON.

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Thanks all for the discussion, I’m very slightly long PTON.

My thoughts were pretty positive. The ultimate question for me(which they start to answer in the CC) is:

“Are people going to go back to the gym?”

They said (my notes): “(They perform) research around going back to gym. Shift into home not because of COVID but COVID accelerated it. Secular shift into fitness in the home. Better experience, better place, better value”

So thats the play. I believe it’s a winner-take-most industry, and PTON has first-mover advantage. Can something like Apple be problematic? Maybe, yet to be seen but IMO, the competition is gym memberships.

Even their Bike finance plan at $49USD/mth must be extremely competitive with the majority of gyms, which leaves speciality gyms to do their thing.

Another thing thats interesting is their focus on Strength workouts. These are workouts that don’t typically involve their Bike or Tread products, although their bootcamps leverage off them. Pilates, Yoga, Barre, Flexibility etc. There’s no requirement for the physical product, so (more or less) location independent. They do state people just using the digital app are a good source of leads for product purchases. That allows them to go after other geographies before they’re ready to ship bikes/treads.

A further interesting option that is afaik pre-revenue is their commercial options, supplying hotels, universities, apartment buildings, corporates etc.

Finally, theres their accessories/clothing lines which they don’t break out.

So a bunch of options for future growth, and an ailing incumbent (gyms).

cheers
Greg

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“The call was upbeat and by all accounts they are the Apple of fitness.”

Jeff,
Aren’t all earnings calls pretty upbeat? The earnings were a bit disappointing along with guidance.

Also, Apple just might end up being “The Apple of Fitness”. They are serious about fitness and the Iwatch. Here in Los Angeles I’m very close to their new fitness building they just occupied, and already under construction is a corner city block 4 story building next door. I believe their fitness app is about one third the monthly price of Peloton. I haven’t looked at it yet, but I’m curious.

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I sold out of my share because I didn’t feel as confident as you guys do. I’m reluctant to stay in companies I’m no longer confident in. PTONs mobile only subscription is already more expensive than most of the players on the market.

Assuming that Apple dishes out quality workouts, large groups of subscription only users may leave PTON for Apple. Apple has a lot more data at its disposal from their watches to display on screen to their users.

Speaking for myself only, I signed up for PTON for a couple months but jumped ship to the Nike app instead since they had more workouts with a larger variety. Of course, I then got a Mirror (by lululemon) for Christmas so I had to cancel Nike after that.

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I also sold out.

Living in an ivy league small town with a very exercise oriented community (ahead of the curve) there was big uptake of Peleton 12-24 months ago that has subsided by now. While this has not manifested itself in the current report, the nation typically lags what is happening in my community. Did not find guidance encouraging either.

People either use different apps on their peleton bike (https://www.dcrainmaker.com/2020/06/how-to-load-zwift-or-tra…) or have moved on, mostly apple fitness.

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An expensive product with continuous strong demand is a very good thing.

Also I don’t see the guidance as weak at all. Q4 has been seasonably lower in the past and they guided it to be Above their Q3 guidance. If they get the supply issues fixed by then (they should) and the Tread has a good launch it should be a very good Q4 and FY22

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@ tryingmybest

-Not all earnings calls are upbeat. When a company that is growing over 100% a quarter tells you their demand has not seen any softening at all (especially with covid vaccines rolling out), that is a very upbeat comment. When they tell you that most of their growth has been organic and their marking spend is low, that is also a very positive (aka upbeat) comment.

-They are like Apple in that, they have an almost cult-like following, amazing brand recognition, and people are willing to pay up for a very high quality, sticky product.

-Yes, Peloton has competitors but they aren’t making much of a dent so far.

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I’m a Peloton bike+ owner. To me, it’s similar to iPhone that I cannot live without. I have many exercise equipment bought from Costco. But rarely use them. I also had a gym membership. Every time it’s a pain to exercise. But Peloton is fun. Everyday I’m eager to ride the bike. It’s addiction. The used Peloton bike on sale on the internet is more expensive than the new one. That tells something. The CEO said during the conference call that even with all the delays no order cancelling. The demand is as strong as ever and re-opening won’t affect it. They are making as many bikes in a month now as they did in the whole year in 2018. I feel it’s like the early years of Apple or Tesla. For EV, people only want a Tesla and won’t consider any other brand. Same thing for exercise bike, people will only consider Peloton. There is a network effect here because all your friends are on Peloton.

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So, we can say with pretty high certainty that Pelotons Q4 sequential revenue will not come in negative. Pretty amazing considering this company usually sees its revenue drop significantly QoQ in Q4 each year. This indicates to me that their back long is STRONG.

Rex - Thanks for your thoughts. After your reading your post and working my way through the conference call I do think the picture is better off than I had stated previously.

A couple points from the conference call found here: https://www.fool.com/earnings/call-transcripts/2021/02/05/pe…

Manufacturing issues are in the rear view mirror

At least for the most part. This was barely discussed on the earnings call but all indications are they have no problem with their manufacturing keeping up with demand.

Getting the product through the port congestion is THE issue currently

Here’s where the $100M comes in for this quarter and next. Management assures us this is a 1 time event …so far as they are expecting. This is primarily a charge for air freight to get past the port congestion.

From the CFO - “what I can say is that we do expect that this $100 million, which we recognize is a very large investment. We believe will get us back to normal shipping protocol by the end of this fiscal year”

From President William Lynch "…why the expedited shipping now versus six months ago, this is meaningful and we appreciate the question. Six months ago we looked at it and it wouldn’t have helped, because if you looked at what we were manufacturing on a daily basis, first what we were selling that was at a deficit that equation, meaning we were building the backlog.

All of this means that Gross Margins will start to improve in Q4 and beyond, from what leadership stated on the call.

“We expect these expenses to have a material that short-term impact on our Connected Fitness gross profit margin in Q3, while the impact of Q4 will be more muted”
“We believe these outside shipping costs will largely abate by June as we build up significant inventory stateside in the coming months.”

I do appreciate the transparency from leadership on the call. They came off as open and honest with nothing to hide. That’s a confidence builder.

So what about the Q3 and Q4 revenue numbers? Since revenue is recognized at time of delivery, and Peleton does not tell us how much of that number is backlog coming down, I’m left to wonder how much Q3 would have grown had they not had a delivery issue. But still, there’s enough data to tell that no matter what, demand is still strong. Leadership re-iterated that several times on the call.

If at the Q3 earnings release Peloton guides for improved margins, which they are stating right now that they will, its easy to see the share price moving 20% from here.

My current challenge is in not anchoring to the lack of price movement from the peak in October until now, up only about 8 or 9%.

-AJ

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