Surging subscriptions drive gains for Peloton’s share price

Peloton’s most recent earnings report missed earning-per-share expectations, but beat analysts’ revenue expectations by 12%. Investors piled into the stock the following day, which appears to be reviving its fortunes one year into CEO Barry McCarthy’s tenure.

- Peloton’s shares gain on subscription revenue growth.

- CEO McCarthy anticipates “epic comeback”.

- iShares Virtual Work and Life ETF up 14% year-to-date.

The Peloton [PTON] share price gained 26.5% on Wednesday, following second-quarter (Q2) 2023 results that showed a revenue beat and narrowing net losses. A 22% year-over-year increase in subscription revenue also fuelled investor confidence.

Many investors had considered the exercise equipment and media company to be on the way out, with the stock having fallen 52.7% over the 12 months to 31 January, and 77.8% throughout 2022. However, the stock had already gained 62.8% through 2023 prior to the earnings announcement, and was up 106% by Wednesday’s close.

“If you’ve been wondering whether or not Peloton can make an epic comeback”, Peloton CEO and president Barry McCarthy stated in the shareholder letter, “this quarter's results show the changes we’re making are working.”

McCarthy noted that these quarterly results were the best in the 12 months that he has been at Peloton, a time marked by a thorough and, apparently, successful turnaround of the business.

Earnings review

The most eye-catching aspect of Peloton’s results was its revenue, which came in at $792.7m. While this reflected a 30% fall year-over-year, it was a 29% increase on the previous quarter, and 11.6% over the $710m consensus estimate of analysts polled by Refinitiv.

The breakdown of these revenues is also significant. While a 52% fall to $381.4 in connected fitness product revenue accounted for the bulk of the company’s year-over-year decline, subscription revenue surged by 22% to $411.3m. Fitness product margins were just 6.5% a year ago, and came in at negative 11.2% this quarter. Subscription profit margins, by contrast, increased from 71.4% a year ago to 72.1% this quarter.

Net losses came in at $0.98 per share, missing the $0.64 loss per share that analysts had expected by 53%. Nevertheless, net losses narrowed 29.5% from losses of $1.39 in the year-ago quarter, indicating that McCarthy’s efforts may be having a significant impact.

McCarthy opened the shareholder letter by explaining that the business’s free cash flow (FCF) had improved from negative $747m nine months ago to negative $94m this quarter.

“But strip out the costs of paying suppliers to settle obligations for parts we don't need,” he said, “and we generated positive FCF of approximately $8m in Q2.”

Post-pandemic strategy falls short

Peloton’s share price ballooned over the Covid-19 era, peaking at $167.42 on 13 January 2021. Since then, however, it has been in steep decline to its recent closing price of $16.36. Initially, the fall was due to the re-opening of gyms and a reduction in customers feeling the need to exercise at home. Over the last year, its challenges have expanded on the back of rising inflation and interest rates.

Having never turned a profit since it went public in 2019 — even while macroeconomic conditions were optimum for its product — Peloton’s stock has fallen 90.2% since its 2021 peak.

The recent results seem to indicate that conditions might be swinging back into Peloton’s favour, or at least that it has a viable strategy to prosper. Analysts are divided, however, on whether momentum can be sustained. At the optimistic end, a 12-month price target of $20.00 represents 22.2% potential upside for the shares. However, the low target of $4.50 sees the stock falling 72.5% over the coming 12 months, according to Refinitiv survey results.

“The business model still has a lot to prove”, Neil Saunders, managing director of GlobalData, told Reuters.

Funds in focus: iShares Virtual Work and Life ETF

Many would argue that despite the end of the pandemic, some of the changes it ushered in are here to stay, among them working from home and — perhaps — exercising there as well.

The iShares Virtual Work and Life ETF [IWFH] offers investors who share this view access to many of the most prominent stocks and businesses associated with the trend.

As of 31 January, Peloton has a 1.80% weighting in IWFH. Netflix [NFLX] has a 2.05% weighting, while Spotify [SPOT] has a 2.60% weighting. The fund is down 21% in the past 12 months, but has bounced 17.1% year-to-date.

Alternatively, investors who feel health and fitness will perform well in 2023 can select the Global X Health & Wellness ETF [BFIT], in which Peloton has a 2.01% weighting as of 2 February. BFIT has fallen 8.7% over the past 12 months, but gained 13.4% year-to-date.