Yahoo Finance’s Brian Sozzi, Myles Udland, and Julie Hyman discuss Peloton’s latest earnings report and company outlook with Paul Golding, Macquarie Group Senior Research Analyst.

Video Transcript

MYLES UDLAND: Joining us now to talk a bit more about the quarter for the company is Paul Golding. He's a Senior Research Analyst over at Macquarie. So Paul, I want to start with something you called out right at the top of your note, which I thought was an interesting kind of good problem, bad problem, still a question for the company, which is their inability to keep up with demand, even nine months-- or seven, eight months into this pandemic, where they've just been such a huge winner among consumers. What does that say to you, I guess, about how you see the management team handling this period?

PAUL GOLDING: Well, Myles, thanks for having me on. It's great to be with you. I think the initial take was, oh, no, there seems to continue to be a supply constraint issue, and will this get resolved to take advantage of the full picture of demand for Peloton's products and in-home fitness?

Our view around the mix question-- this is really a mix question around Bike, original Bike, and Bike+. Our view is that we were a bit disappointed to see that the company didn't expect more of the mix demand to lean towards the new Bike+ despite the higher price point, because it is the newfangled, new featured, cool device that's being sold from a lifestyle brand that has a lot of brand value and recognition. And so while there were other extraneous factors like port congestion and COVID warehouse interruptions, we do think that, you know, there could have been some extra confidence around the mix leaning towards the new, more expensive product.

BRIAN SOZZI: Paul, I talked to Peloton founder John Foley this morning before air, and I asked him, are you concerned about the upcoming Apple fitness product? He downplayed it. He downplayed it again. I asked the same question a couple months ago. As someone who models out Peloton's forward earnings, should Peloton be more worried about these coming Apple fitness products?

PAUL GOLDING: Apple's integration with their wearables is certainly an advantage that they have in onboarding and retaining fitness subscribers. But I would highlight the fact that Peloton stands alone as a lifestyle brand that delivers a lot of daily fitness-focused, fitness-only type of content, or wellness content, including yoga and meditation. And for a business like Peloton that is integrating that with the actual treads and bikes, as well as the ability to use the Apple Watch and wearables seamlessly, I think they-- their sole focus being this arena, they have the scale and they have the momentum to keep going and growing this.

JULIE HYMAN: Paul, you know, I'm always a little skeptical when we're talking fitness, because fitness trends don't tend to last, right. I don't know what the average sort of run time of various fitness trends is, but, like, what's the lifecycle of Peloton? I mean, spinning itself, is that going to turn? How are you thinking about this in terms of a longer-term investment thesis?

PAUL GOLDING: Sure. Well, I think, like many interactive SaaS types of businesses, the subscription is the key, the subscriber base and the ability to deliver content that retains subscribers and grows that base. Peloton's extremely diversified in that arena in that not only do they have the bike and tread integration, which, in my view, are fairly basic concepts, spinning bike and running or walking or boot camp on a treadmill, as well as so many other verticals that have been around for a while, we're talking about general high-intensity interval training, yoga, as well as bar, these are not new concepts, but Peloton's found a way to deliver everything in a seamless package and deliver it online to you wherever you are as a customer. So I think there's more resiliency there than in a particular studio fad.

MYLES UDLAND: And I guess, Paul, a question related to that is-- and this is for a number of businesses during the pandemic, Peloton being a major one of them, is, does this change the TAM that this company had been looking at maybe two years ago, and this step change in demand they've seen, is that putting the business on a new trajectory that maybe they hadn't even contemplated or you as an analyst hadn't thought about when they IPOed?

PAUL GOLDING: Well, TAM has a few levers. One lever that we're seeing right now is new SKUs. They launch a new SKU, there seems to be a lot of demand for the new SKU, as well as the old SKU given the price difference.

The other TAM lever is pricing. The company's been very committed to making their kind of fitness products more accessible. They've seen TAM grow from that as well.

And then there's the international component. They've launched in the UK. They've launched in Germany. As they expand their ability to produce content in various languages or they see acceptance of subtitled content, that also is a step function in TAM, and part of that is from growing recognition in other parts of Europe or in the US and having that spillover. So certainly, TAM that-- is tough to quantify when there's so much opportunity to grow.

BRIAN SOZZI: Well, I asked Foley-- they're sitting on over $2 billion in cash. I asked him, what are you doing with this cash? He said he's going to invest it in manufacturing and other logistics capabilities. Certainly makes sense to me, given the backlog of their products. But they're so focused on strength right now, would it makes sense to pay up to buy Tonal?

PAUL GOLDING: Well, I think, in general-- I can speak in general terms about our view on what could shore up some of the pieces of the fitness ecosystem for them. I do think that, as they've said many times, they're focused on strength. It doesn't require an industry expert to see that brick and mortar fitness does have more ability to deliver the hardware and the equipment. They have the space. They have the ability to invest the capital in commercial-strength equipment.

And that is something that is tough to replicate in the home. And so if Peloton were to invest in developing some kind of at-home ability to engage in more traditional strength, that could be something that opens up the TAM even more. But I would say that we view the opportunity to deliver a logistics value chain domestically favorably. We see that as a favorable development in the sense that currently they're having to airfreight some Bike+ inventory in order to get the inventory to customers in the time frame that they want to, or at least closer to the time frame that they want to. So we think investing in capacity for supply is always a good move.

MYLES UDLAND: All right, Paul Golding with Macquarie, outperformed rated, $150 price target on Peloton. Paul, thanks so much for joining the show.

PAUL GOLDING: Thanks for having me.