You may remember Peloton’s now-infamous holiday ad, featuring a woman using the bike her husband gifted her for Christmas—which was deigned sexist by some. But Wall Street analysts are predicting that, despite backlash from the spot, Peloton’s 2nd fiscal quarter earnings (reporting on Feb. 5) will only show the company has pedaled over the bumps in the road toward strong earnings.
Back in December investors were quick to pump the breaks, slashing some $1.5 billion off the fitness company’s market cap in the wake of the ads and ensuing controversy. But having since recovered much of their losses (the stock is up some 20% from its dip in late December, but still off from all-time highs), some like Raymond James’ Justin Patterson believe the ad debacle won’t have a material impact on Peloton’s upcoming earnings—in fact, quite the opposite.
“[The ad] didn’t appear to have any effect on sales trends during the period, and likely suggests what we had suspected around it—that the people who were upset weren’t going to buy the bike anyway, whereas the ones that were buying it were still happy with the gift and are enjoying the product,” Patterson tells Fortune. That hypothesis is backed up by stellar iOS reviews for the Peloton app, which boasts 5 stars for 95% of ratings.
And it appears brand awareness has skyrocketed since December (right after the ad was released), as U.S. “Peloton” search queries rose to a high of 152% year-over-year in the calendar 4th quarter of 2019.
Yet according to estimates for the quarter from SimilarWeb, a web analytics provider, Peloton’s Android app open rate (how often users who downloaded the app actually open it) steadily declined in 2019, from around 11% in January to around 7% in December—representing a “steady decline of people using it on a daily basis,” that could indicate waning loyalty, Ed Lavery, the director of SimilarWeb’s investor solution, tells Fortune. However, Raymond James’ Patterson thinks metrics like open rate aren’t going to be as key in understanding the business moving forward. “Now that Peloton is integrating into TVs and other platforms like that, that further makes looking at one individual data point a bit more challenging,” he says.
Instead, ahead of Peloton’s earnings, Patterson is optimistic that the company had a “great holiday season,” and is even raising his revenue estimate by 1% to $432 million for the company’s 2nd fiscal quarter. He notes that, “even at their higher [revenue estimate] numbers, I think there could potentially be some positive surprises ahead.” (Raymond James also raised their price target for Peloton from $32 to $36 per share, as did JPMorgan’s Doug Anmuth last week, from $34 to $38).
For one, Patterson is looking to Peloton’s earnings next week with two key questions in mind: “A) how much of that holiday lift did Peloton get, and then B) are users staying active into the New Year? Are they still keeping up with their New Year’s resolutions? If both of those answers are pretty positive, then we expect good things for Peloton over the course of the year.”
Of course, Peloton (like many of the billion-dollar startups to IPO last year) is still burning cash, and currently Street consensus estimates for the company’s 2nd fiscal quarter earnings comes in around $421 million in revenues and a loss of $0.32 earnings per share.
Peloton earnings preview
Analysts like Patterson are watching three key metrics going into Peloton’s earnings this week—namely, subscriber numbers, connected fitness revenue (think bikes and treadmills), and churn rate.
Or, in other words, “is Peloton selling products and signing up subscribers, yes [or] no? And are those subscribers sticking around?” Patterson asks.
For the fitness company’s 2nd fiscal quarter, Raymond James is estimating connected fitness revenue to come in at $344 million (which would be a 55% increase year-over-year), and subscription revenue to hit $74 million (a whopping 97% increase year-over-year).
Peloton’s U.K. business also seems to be growing, although at a somewhat insignificant pace in the last quarter (at around 3% of revenues). International growth may be a point of discussion for executives at earnings next week, Patterson contends, especially around burgeoning areas like Germany (the company’s first non-English speaking market to launch).
And as investors tune in to Peloton’s earnings call on Wednesday, they shouldn’t be surprised if the management team reiterates Peloton’s strategy for growth investing this year over profitability (Peloton CEO John Foley notably declared on the company’s last earnings call that, “If we pull back on growth we could be profitable tomorrow.”).
Another area investors should monitor? Competition, notably from Equinox and various fitness products at CES 2020—although at this point it’s more of a “wait and see” for investors, Patterson says.
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