That's the first and most likely explanation for why I gave Peloton's quarter an A- and Wall Street took the stock out back and shot it.
I don't own Peloton shares because I was counting on an incremental 10c on EPS. Not this quarter. Not this year. I refuse to believe otherwise smart people would sell $PTON down 10% or more because of the EPS miss.
I didn't expect a lot of sales from hardware. If you want a Peloton bike you probably have a Peloton bike. Peloton also fired its head of Marketing in April. If you're new to investing in the consumer space here's a tip: No one fires their head of marketing a week before they report earnings because sales are going great.
I wanted to see low Churn (1.2%... perfect). Strong Cash Flow ($96M from ops, so good (for them)) and ongoing cuts (TBH, and this also goes against the building consensus) I'd like to see more aggression on doing things like moving out of the retail stores (more on that below).
If Peloton is generating ~$100M / quarter and subs aren't leaving the company simply isn't a zero. It's a target. Works better as part of a streaming service or private or almost anything but it's not going to disappear.
So why were people picking on Peloton this morning, sending shares as much as 15% lower? Let's run through the Bear Case.
The Other Side:
Criticism 1: Lack of a Specific Growth Plan
Hardware sales are soft across the board, to the point that bikes weren't even addressed. Peloton is stuck with its core product being a connected fitness spin-based fitness service. The company realizes a lot more people tread than spin but it's not clear how much penetration has been achieved with the Tread+, let alone the (in my opinion) misguided row machine.
Here's a good rule for fitness, business, and life: You're either bulking up or cutting. You can try to do both at once but it doesn't work. Peloton has been throwing money at bad ideas for years. Once they finish ripping out expenses Peloton will have a better idea of what kind of war chest it has for growth. This is a bit like the initial Starbucks criticism. People criticizing SBUX for figuring out the core problems before trying to get into growth mode don't understand the business.
Peloton still doesn't even have a full team in place for this turnaround. A year ago the company was working against the clock on a ticking time bomb of debt. The new team can pay the bills indefinitely. Let it cook.
Criticism 2: Putting Peloton's on Precor Screens Hurts the Brand
Peloton spent a long time wanting to be a closed ecosystem. If you wanted to be on the leaderboard and use the content you had to buy Peloton-specific hardware. That was dumb for a couple of reasons. 1) it was like demanding all tennis players use specific balls. Insane over-reach and simply not how people want to exercise. 2) A bike is a bike, even with an iPad jammed to the handlebars. Peloton's content is king.
Peloton spent $420 million buying Precor during the COVID bubble. Because, seriously, the company was SO high then. Precor almost certainly makes up a large % of the equipment in whatever gym you frequent. It's a nice business. You make a good treadmill, place it in reliable gyms and replace it every year or so, on a rolling basis. Unlike Peloton, Precor also knows how to create and distribute products. The basic Peloton bike hasn't been modified in 8 years. It's embarrassing.
It tells you a lot about prior management that Peloton has been dealing with product shortages for its entire existence and never before thought to lean on Precor to solve the problem.
Precor is going to make treadmills with screens to stream Peloton content in gyms and hotels. I can see how that would diminish the value of Peloton's hardware business. Then again, Peloton's hardware business is less than half total revenues and has gross margins ~1/5th of the streaming business.
This solves Peloton's manufacturing issues in China (to a degree) and expands the platform not just for free but to the benefit of Precor, a company Peloton owns. It's a good trade for Peloton.
Beef 3: Underestimating Placing Peloton in Hotels & Gyms
Peloton has a deal with Westin to put bikes in the hotel gyms. I get unreasonably excited when I see a Peloton bike in a hotel gym for two reasons. First and foremost, hotel gyms are famously horrible. Typically a horrendous stationary bike, a pulldown machine, and a couple of treadmills. There's a depressingly small TV in the corner of the room but you can't work the remote and don't know local channels, regardless.
Putting Peloton in hotel gyms is like putting WiFi in all airplanes. It's a chance for every customer to tap into a private world away from whatever compromises were made in turning what used to be the hotel mail room into a horrible gym. Can you quantify the precise value of having hotel gym customers and airplane passengers docile as cows with their WiFi and Emma Lovewell workouts? Maybe not but pacifying your most "high energy" customers for a very low, largely fixed rate is just obviously good business.
Peloton isn't going to grow the way it did during COVID anymore. They need to shift to a company cementing market share. That happens by using AI to customize workout plans (already happening), making the platform available and convenient with the hardware and software linkedd. Finnaly ditching vanity, legacy programs like stores sucking our financial and mental resources
Underestimating the Cuts to Be Made
I want Peloton out of the retail locations. Yesterday.
In the call Peloton noted a "microstore" in Nashville, at one-tenth the square footage and a fraction of the rent of existing stores "exceeded our average North American retail showroom... in terms of revenue".
As long as Peloton is still making apparel and running retail stores there will be scores of millions to save.
Action
I'm staying long in the portfolio. Staying long in my personal accounts and staying long for my kids (who technically make their own decisions but... you know). Peloton beat. It shouldn't have been down in the first place and I doubt it will be for long.
