Peloton still in ‘coveted position’ in connected fitness market, analyst says

Kevin McCarthy, Senior Research Analyst at Neuberger Berman, sits down with Yahoo Finance Live to talk about the interest Peloton has garnered from various companies, its CEO change, and Peloton’s subscriber growth.

Video Transcript

Welcome back, everyone. At Peloton, it is the end of the CEO cycle for co-founder John Foley, who will matriculate to the executive chair role, while Barry McCarthy steps in as CEO and President. Peloton simultaneously released a strategy to reduce costs, which includes cutting approximately 2,800 global positions and trimming warehousing and delivery operations.

Joining us now for what’s next for Peloton, we’ve got Kevin McCarthy, who is a senior research analyst at Neuberger Berman. Kevin, good to have you here with us today. The company had also released earnings as well, which we’ll dive into. But just on the headline of the CEO changeover, what is this signaling from Peloton to the broader investment community?

KEVIN MCCARTHY: Great. Thanks for having me. It’s a pleasure to join. And yeah, certainly a lot of drama unfolding. I think to your question of what was important about today’s announcement, it’s really twofold. It’s a nod to the frustration investors have had, really, for the last nine months.

And exactly what John Foley’s new role as the executive chairman is probably still somewhat TBD to be honest. But importantly, the new CEO Barry McCarthy really strikes us as being a legitimate agent of change, strong credentials around optimizing subscriber unit economics. And importantly, we don’t think what he’s doing necessarily takes Peloton out of play. It simply cleans up the business model, something that we all knew was a very compelling attractive business model in the first place.

And then the second item is that today’s release also provides a very credible line of sight to profitability for ’23. Ramping at ’23 and into ’24. In the past the problem has been simply the numbers have not been– the guidance has not been believable. Prior approaches have been to piecemeal. And now we actually have tangible milestones that we can mark to market that amount to around $800 million over the next 24 months. And that’s not even including any growth as well.

But Kevin, of course, this announcement comes amid multiple reports that Peloton may be seen as a target of an acquisition by an Amazon or Nike for instance. So do you think these changes we’re seeing at Peloton, this C-suite shakeup and also the 2,800 jobs that it’s going to be cutting, are a sign that Peloton is trying to make a bid to remain an independent company that is now more streamlined?

KEVIN MCCARTHY: It’s an interesting question. And I don’t think it’s, as I said before, I don’t think the replacement of John Foley with Barry McCarthy necessarily indicates that they’re going to be going one way or the other in this situation. It merely cleans up what I think we all knew was a very attractive subscriber business model.

Taking a step back, maybe, this is a very attractive long-term asset. If you think about the context of Peloton, the 3 million subscribers that they’ll have by the end of this year, fiercely loyal, leading NPS scores. Customer engagement is actually up still 20% over the last two years, and it accelerated in January from December. So we argue that the fee stream alone from this business is being undervalued when you use cross-industry subscriber models.

And the other point that we make just from the context of a long-term perspective and what makes this attractive for the likes of an Amazon, a Nike, an Apple, physical and mental wellness are extremely relevant from a consumer standpoint. And we think connected fitness is the cherry on top. So if you look kind of the underpinnings for this, you have the emergence of two huge generations coming into their prime spending years.

Yes, we probably pulled forward some demand, but time and time again when we look at psychographic studies, the TAM case is probably still in the mid-teens millions for this in the US alone. So if you compare that where Peloton is today at 3 million, something mid-teens is still a huge amount of growth. And strategically speaking, a leadership position in the connected fitness, which is something if you look at what Apple or Nike or Amazon would want, that’s a coveted position.

Well, let’s think about that a little bit more because at the market cap that they’re carrying right now for Amazon and what they’ve already signaled within the fitness space, they’re going to be more of a companion with the Amazon skills rather than going purely after a hardware player. Apple, they don’t have a history of making big acquisitions, especially not to this size and scale. And Nike has exited from much of the even sports equipment markets that they were in previously. So the question being, at what price point would it make sense for any of those companies to buy Peloton?

KEVIN MCCARTHY: Well it’s a great question. And I think the answer is, this might have been an exercise to see who flinched first. Having a leadership position in connected fitness I think is very attractive. For Apple, it would significantly fortify their leadership position in individual wellness and fitness. So I think that there is, even though that hasn’t been something they’ve been as excited about going on with the hardware, I think it goes a long way in fortifying the moats around their leadership.

For Amazon, it would be a little bit different. They could dramatically alter the CAP proposition, the cost proposition from a logistics and a warehousing perspective. They’re clearly the agitator in this situation. And Nike I think would very much so appreciate having a leadership position. But this might be more of a distraction for them. There’s plenty of growth, I think, on the bone with Nike and DTC right now, so that this isn’t a mission critical thing for them right now. But I think all three of them strategically talking about a market that has the potential to grow 5x just in the United States alone would be attractive strategically for all of them.

I’m also wondering more broadly, how strong is the Peloton brand right now to the general public and consumers? And has it lost any of its sheen, again, to that average user because of everything that’s gone on within the company over the past year and because of this decline that we’ve seen in the stock price over the past 52 weeks?

KEVIN MCCARTHY: It’s a great question. And that’s frankly what we look at. We look at the subscriber engagement, to what extent, the churn rates, how many times people are using it a month. I believe it peaked at around 24 times a month [INAUDIBLE], and that was during the height of COVID when they were just introducing a number of different verticals. It’s leveled off at around 15 times a month, which is still a very attractive engagement for a consumer proposition standpoint.

Now there is competition coming in, and that’s something that everyone is mindful of. However, I would say that the benefit that Peloton has is, number one, their first mover advantage. Number two, the stationary bike is something that lends itself to customers having a pretty strong awareness and understanding of what the product is and what it does. So while there has been probably some element of tarnished reputation as a result of this, the value add, if you look at the relevant forums across Peloton, the engagement is still quite strong.

Great to have you here and have this conversation with us today because they’re certainly so much more in this story. Clearly two Kevin’s are better than one. Kevin McCarthy, senior research analyst over at Neuberger Berman joining us today to break down what is next for PTON and Peloton.

https://finance.yahoo.com/video/peloton-still-coveted-position-connected-213821737.html

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