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Peloton (NASDAQ:PTON) Q4 Sales Beat Estimates But Guidance Weaker Than Expected


Full Report / February 05, 2024

Exercise equipment company Peloton (NASDAQ:PTON) reported Q2 FY2024 results beating Wall Street analysts' expectations, with revenue down 6.2% year on year to $743.6 million. On the other hand, next quarter's revenue guidance of $712.5 million was less impressive, coming in 5.5% below analysts' estimates. It made a GAAP loss of $0.54 per share, improving from its loss of $0.65 per share in the same quarter last year.

Peloton (PTON) Q2 FY2024 Highlights:

  • Market Capitalization: $2.00 billion
  • Revenue: $743.6 million vs analyst estimates of $734.2 million (1.3% beat)
  • EPS: -$0.54 vs analyst expectations of -$0.52 (3.6% miss)
  • Revenue Guidance for Q3 2024 is $712.5 million at the midpoint, below analyst estimates of $753.8 million
  • The company dropped its revenue guidance for the full year from $2.75 billion to $2.71 billion at the midpoint, a 1.4% decrease
  • Free Cash Flow was -$37.2 million compared to -$83.3 million in the previous quarter
  • Gross Margin (GAAP): 40.3%, up from 30.1% in the same quarter last year
  • Connected Fitness Subscribers: 3 million

Started as a Kickstarter campaign, Peloton (NASDAQ: PTON) is a fitness technology company known for its at-home exercise equipment and interactive online workout classes.

Launched in 2012, Peloton brings immersive fitness experiences into the home. Its products aim to meet the growing need for a convenient and effective workout regimen.

The company offers a suite of interactive fitness equipment, including stationary bicycles and treadmills, complemented by video streams of live and on-demand workout classes. These solutions seek to bring the community and energy of live studio classes into the user's home.

Peloton's revenue streams are multifaceted, including the initial sale of exercise equipment, ongoing subscriptions for class content, and a range of branded apparel.

Leisure Facilities and Products

Consumers have lots of choices when it comes to how they spend their free time and extra money, so the companies offering leisure products and experiences must highlight their value proposition. Fitness companies may be riding the wellness trend, for example, while those selling recreational vehicles or toys may have to lean into innovation to stand out. Either way, all leisure companies must compete against the 800-pound gorilla of social media and streaming entertainment, which offer instant gratification and have been taking share of consumers’ free time for over a decade.

Competitors offering at-home fitness products and online workout classes include Nautilus (NYSE:NLS), Lululemon (NASDAQ:LULU), and Planet Fitness (NYSE:PLNT).

Sales Growth

Examining a company's long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Peloton's annualized revenue growth rate of 34.3% over the last 5 years was incredible for a consumer discretionary business.

Peloton Total Revenue

Within consumer discretionary, a long-term historical view may miss a company riding a successful new product or emerging trend. That's why we also follow short-term performance. Peloton's recent history shows a reversal from its 5-year trend, as its revenue has shown annualized declines of 18.8% over the last 2 years.

We can dig even further into the company's revenue dynamics by analyzing its number of connected fitness subscribers, which reached 3 million in the latest quarter. Over the last 2 years, Peloton's connected fitness subscribers averaged 12.6% year-on-year growth. Because this number is higher than its revenue growth during the same period, we can conclude the company's average price per sale has fallen.

This quarter, Peloton's revenue fell 6.2% year on year to $743.6 million but beat Wall Street's estimates by 1.3%. The company is guiding for a 4.8% year-on-year revenue decline next quarter to $712.5 million, an improvement from the 22.3% year-on-year decrease it recorded in the same quarter last year. Looking ahead, Wall Street expects sales to grow 4.6% over the next 12 months, an acceleration from this quarter.

Operating Margin

Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Given the consumer discretionary industry's volatile demand characteristics, unprofitable companies should be scrutinized. Over the last two years, Peloton's high expenses have contributed to an average operating margin of negative 59.2%.

Peloton Operating Margin (GAAP)

This quarter, Peloton generated an operating profit margin of negative 25.2%, up 16.6 percentage points year on year. This increase indicates the company was more efficient with its expenses over the last year, spending less money in areas like corporate overhead and advertising.

Over the next 12 months, Wall Street expects Peloton to shrink its losses but remain unprofitable. Analysts are expecting the company’s operating margin to rise by 20.8 percentage points.

EPS

We track long-term historical earnings per share (EPS) growth for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.

Peloton EPS (GAAP)

Over the last 5 years, Peloton cut its earnings losses and improved its EPS by 32.5% on average each year. This performance, however, is lower than its 34.3% annualized revenue growth over the same period. There are a few reasons for this, and understanding why can shed light on its fundamentals.

While we mentioned earlier that Peloton's operating margin has improved over the last year, a 5-year view shows its margin has declined 3.9 percentage points. This means the company became less efficient with its operating expenses and it also diluted its shareholders. Other line items like taxes and interest expenses can also affect EPS growth, but they don't tell us as much about a company's fundamentals.

In Q2, Peloton reported EPS at negative $0.54, up from negative $0.65 in the same quarter a year ago. This print unfortunately missed analysts' estimates, but we care more about long-term EPS growth rather than short-term movements. Over the next 12 months, Wall Street expects the company to decrease earnings with analysts projecting a 48.5% year-on-year decline in EPS to -$0.80.

Cash Is King

If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

Over the last two years, Peloton's demanding reinvestments to stay relevant with consumers have drained company resources. Its free cash flow margin has been among the worst in the consumer discretionary sector, averaging negative 28.3%.

Peloton Free Cash Flow Margin

Peloton burned through $37.2 million of cash (negative 5% margin) in Q2, increasing its cash burn by 60.6% year on year.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company's revenue growth was profitable. But was it capital-efficient? If two companies had equal growth, we’d prefer the one with lower reinvestment requirements.

Understanding a company’s ROIC (return on invested capital) gives us insight into this because it factors the total debt and equity needed to generate operating profits. This metric is a proxy for not only the capital efficiency of a business but also a management team's ability to allocate limited resources.

Peloton's five-year average ROIC was negative 13%, meaning it lost money on its investments. Its returns were among the worst in the consumer discretionary sector and suggest it historically burned cash for growth.

Key Takeaways from Peloton's Q2 Results

It was encouraging to see Peloton narrowly top analysts' revenue expectations this quarter. That stood out as a positive in these results. On the other hand, its EPS missed analysts' expectations and its revenue guidance for next quarter missed Wall Street's estimates. Overall, this was a mediocre quarter for Peloton. The stock is up 2.5% after reporting and currently trades at $5.71 per share.

Is Now The Time?

Peloton may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Peloton, we'll be cheering from the sidelines. Although its revenue growth has been exceptional over the last five years, its cash burn raises the question of whether it can sustainably maintain growth. And while its projected EPS growth for the next year implies the company's fundamentals will improve, the downside is its operating margins reveal poor profitability compared to other consumer discretionary companies.

While the price is reasonable and there are some things to like about Peloton, we think there are better opportunities elsewhere in the market right now.

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