Peloton stock has its best day in four months following Q2 earnings release

BMO Managing Director Simeon Siegel breaks down Peloton's stock surge following a revenue beat, the upwards trends the luxury fitness brand is riding after a tough 2022, and comments on Nike's sneaker collaboration with jeweler Tiffany & Co.

Video Transcript

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- Peloton having their best day in four months. Look at these numbers-- up 25%, the company releasing its second quarter earnings report. Their CEO Barry McCarthy, who has been on a year-long hill ride telling investors in a letter today, quote, "if you've been wondering whether or not Peloton can make an epic comeback, this quarter's results show the changes we're making are working."

Let's discuss this with BMO Managing Director Simeon Siegel. Simeon, nice to see you, sir. Epic comeback-- has it begun?

SIMEON SIEGEL: Great-- great terminology. I'm just realizing, I think Barry and I are wearing similar clothes. So who wore it best over here? We're getting a nice little-- I think it's him. I think it's him.

- [? You, ?] sir.

SIMEON SIEGEL: But-- [LAUGHS] there you go. So listen, I think that if this was a traditional discretionary brand selling things, what we would be saying today is, this company beat revenues, to their credit, they've cut expenses, to their credit, but they also missed gross profit dollars.

So we would be asking about what is the quality of this sale. And I that's important. But I want to stress, this was a company that was down in the dumps. People were worried about it. They beat their number. That's the-- that is the headline number.

But we would be asking about that quality of sale. The immediate response should be, well, it's not a traditional discretionary brand, because they also have the monthly recurring revenue that comes from subscriptions. I think for that, we need to ask-- subscription revenue was actually down sequentially.

And there's a timing element. But you have to ask the question for a business that's predicated-- again, it's not a small business-- $5 and 1/2 billion today of market cap-- why is that subscription revenue either flat, down a little bit? Why isn't it growing?

And so these are, I think, the questions where we have to internalize. Epic comeback effectively speaks to growth. I think what the company has done really well is restructuring and fixing a turnaround. I think we are far away from seeing growth.

SEANA SMITH: Simeon, what do you make of the comments that we got from McCarthy just about questions about the viability of the business? He said that those questions have been put to bed. Do you agree with that?

SIMEON SIEGEL: I agree. I do. I think so. I think that there was questions last year about existential risk to the Peloton brand and company-- sorry, more the company. I don't subscribe to those, but I haven't subscribed to those in a while.

I think that the question here is what it should be worth. I think-- listen Seana, I think you and I have talked about this for a while. I think what's fascinating is if we-- if someone was sleeping the last three years, and they woke up and they just started reading about this company called Peloton, and they knew that it was started as a startup not long ago and now it's valued at the market at $5 and 1/2 billion, it would be viewed as a tremendous success.

The problem is that we didn't fall asleep. We watched it do this. And so the perception that, oh, the company has been knocked down, I think we still need to internalize how many companies are not worth $5 and 1/2 billion. And so that's where I think there's a long way in between lack of viability and $5 and 1/2 billion. I think that's the conversation to be had.

- How do we need to view them? It sounds as though we almost view them as a streaming company moving forward. That's where their margins are. They're losing money on the Bikes.

SIMEON SIEGEL: They are. They are losing money on the Bikes. I think there's no way around that. And that's why I say that subscription revenue needs to be going up. And so the big question obviously right now is going to be, what does this member count look like a year from now, three years from now?

We were looking at something that's interesting. The amount of subscribers within their first year, it's the lowest percentage of the total base that has ever existed. That's an obvious comment because during the pandemic, you were doubling your member base every year. You're now not.

The problem with that is you're probably more likely to churn the longer you've had the Bike. And so within that context, I think we do-- right now, churn was OK. Churn was a good number over here. It was in line with what they expected-- up [? versus the ?] prior but still not bloated.

But we're going to have to watch that, right? Because the point about streaming is you don't have to worry about bringing in that new dollar every day as long as the person stays with you. We like talking about CAC because it's a good-sounding acronym, but Cost Of Retention, CRC, doesn't sound as good. But that is important.

And so I think, yeah. I think absolutely the question will be, what do you pay for a streaming business here? what is the ultimate TAM?

SEANA SMITH: Yeah, so Simeon, so what do they need to do, then, to get the more subscribers, to get more members on their side involved with Peloton? Is it lowering the price? Is it something else that they should be doing that they haven't done for the last 12 months?

SIMEON SIEGEL: So what are the rules of engagement here when we're doing this virtually? Am I allowed to throw this on you guys and say, hey, do you both have a Peloton? Are we allowed to play that game?

SEANA SMITH: We do.

- We both do.

SEANA SMITH: We both do.

SIMEON SIEGEL: When did you get it?

SEANA SMITH: During the pandemic.

SIMEON SIEGEL: [INAUDIBLE]

SEANA SMITH: 2020.

- Pre-pandemic.

SIMEON SIEGEL: So the question is, if you bought a pair of pants during the pandemic, you can buy another pair of pants next year. You both had your Bikes already. Maybe you get a Tread. Maybe you get a Rower. Maybe you already have them. That doesn't add a subscriber.

And so the dynamic-- the problem with recurring revenue is that you need to find someone new. And so I think there might simply be a point at which Peloton has obviously pulled forward a tremendous amount of that capacity of that demand. Will there always be new demand? Yes. Will it be to the amount-- is that 100 million number that has been thrown out there, does that seem feasible? Not based on the order of magnitude that we're going today.

And so what's interesting is one of the responses that CEO McCarthy is talking about on the call is this notion of a digital app. Right now, it's declining. The argument here is this is, I think, the line-- there's a lot of fun words out there between "epic comeback," between the Powell comments you were just making-- and I think "path to the promised land" was the term used for the digital app.

We need to see that change. But that's a very different business than the Bike. There are a lot of digital apps out there, and the churn is much higher. So I think that path-- what do they need to do? I would actually argue what they should do is focus on the bare-- on these brand loyalists. Focus on the people that love the community.

I also have a Bike, by the way. And actually maybe raise prices. Get the most you can out of the people like us that love the product. Because at the end of the day, luxury brands don't focus on selling everything to everyone. They focus on maximizing what they-- every unit that they drive.

And I think that's going to be the question. Every brand has to determine balancing exclusivity and distribution. Netflix might not need to do that. Big streaming businesses might not need to do that. As soon as you introduce inventory and halo and luxury and brand image, that conversation changes.

- The underrated part of the app is the meditation side of it, which I use every day and sometimes twice, if you need a little tip there, sir. An interesting letter from Blackwell Capital, though-- and I'm sure you've heard about this-- to Peloton suggesting some of the companies that would be better stewards that should buy Peloton. They threw out Apple, Disney, Sony, Nike, a number of tech streaming metaverse and sportswear companies.

Could they be purchased this year? And who would be a likely candidate?

SIMEON SIEGEL: Great question. Could they? Listen, everything could. I think the question is, should they? And the question is, when and why? Why hasn't it happened yet?

So if I think about it-- one of those companies, right-- if we just quickly go through those companies, one of them is Nike. We have found the athletic brands, Nike, Under Armor, Lulu, all bought connected fitness, and all of them have either walked away from it or written it down. I think we've talked about Lulu's Mirror purchase has gone less than they hoped for. So I don't know that the athletic businesses want to get involved.

Amazon is obviously already connected with the business. Amazon, on the other hand, is in the business of moving a lot of products. That's not brand enhancing. So to the question of if they believe the TAM is large but the brand can be eroded while doing it, then potentially, right? But what does Amazon get that they don't already have right now, [? now that ?] they're already selling the product? So that's them.

Apple, from a branding perspective, I guess makes sense. I think the question I've always wondered-- and I don't cover Apple-- has always been, why wouldn't they have picked up this company earlier? If we're talking about just order of magnitude where Apple was during COVID and where Peloton was during COVID, Peloton was up and to the right.

Peloton had the eyeballs of everyone that they would have had. The engagement now has declined. The perception now has declined. So if you didn't buy before, are you looking now? Again, I don't know, but just throwing out the thought process that at least I would have when thinking about this.

I think right now, Peloton is doing an excellent job flipping their own problems, working on the restructuring, cutting fixed costs. And I think the question is, does that lead to growth or not? You can be a healthy brand. You can be a smaller brand. And the reality is right now, you're getting a lot of credibility from Wall Street at $5 and 1/2 billion market cap. There's worse things in the world.

- I keep nudging Netflix to buy them, but they're not listening, my friend. You cover Nike. You mentioned Nike. Have to get your thoughts on what might be the greatest collaboration in the history of fashion-- Tiffany & Co., Nike's Air Force Ones. They come out March 7 for $400. The little blue shoe box-- that is just glorious.

Have you seen these things? What do you think?

SIMEON SIEGEL: Yeah, we saw the social drops that happened over the weekend and, like any sneaker head I guess, got very excited. Listen, Nike had a-- collaborations are the best gift to the retail world because collaborations, whether they're Nike and Tiffany, or whether it's Supreme putting their logo on an Oreo, just is the beauty.

We talk about the branding with Peloton and social-- and just human psychology, right? This is-- it'll sell out. It won't be needle moving to Nike. But the point is, this is what they do. And they've had really good relationships and really good collaborations with prior LVMH brands.

So I think this, at the end of the day, is great for brand enhancement, great for marketing. We're talking about it now. Do I think it will impact-- am I going to change my model based on it? No, but that doesn't make it any less cool.

- But you want them, right? Let's be clear.

SIMEON SIEGEL: Want-- [LAUGHS] who doesn't? Who doesn't?

- OK, good. Just want to--

SEANA SMITH: He clearly does. It's "the greatest collaboration in the history of fashion." That's a big endorsement.

- I'll be on the SNKRS App the second those drop. And I won't get them, but I will try.

SEANA SMITH: 400 bucks, though.

SIMEON SIEGEL: Good luck. Good luck. You will not get them, but you can buy them on some reseller site because some 12-year-old will be faster than you are.

SEANA SMITH: Yeah. And for even more-- double, triple that. All right, Simeon Siegel, thanks so much as always.

- No doubt.