Peloton could see ‘a respectable comeback,’ analyst says

Evercore ISI Director of Internet Equity Research Shweta Khajuria joins Yahoo Finance Live to discuss Peloton earnings, subscriber growth, hardware sales, and the outlook for Peloton.

Video transcript

[AUDIO LOGO]

JULIE HYMAN: Shares of Peloton are climbing today after the fitness brand showed it had generated more revenue from subscribers than hardware sales for the third quarter in a row. It also narrowed its losses.

Evercore ISI Director of Internet Equity Research Shweta Khajuria joins us now. Shweta, in the call the company said, "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." This is something our Brian Sozzi pointed out. I mean, the stock is up today. Is this the beginning of an epic comeback for Peloton? What do you think?

SHWETA KHAJURIA: Well, the shareholder letter did use the word "epic." I-- my view is that it may not be an epic comeback, it may be a respectable comeback because right now investors are very keenly focused on the company's ability to turn around its free cash flow trajectory, more so than the growth trajectory.

Back in-- during COVID, that period was more of a growth name with a lot of subscribers coming in. Now, it has turned into will this company-- can this company sustain itself on a free cash flow basis? And we are increasingly seeing that they can because a lot of the cost cuts are in their control.

The-- why I think that it's a respectable turnaround is because the other part of the growth-- or the other part of the business strategy is top line growth. And that is not fully in their control. We are still questioning the size of the market, the company's ability to drive subscriber growth going forward, and the balance of growth and profitability.

- Well, what is that longer term top line perspective? What should this company be doing? Because, of course, at the height of the pandemic, everyone was modeling Peloton as if every single household around the world would no longer go back to the gym. And we'd have a bike, a rowing machine, and, oh, yeah, a treadmill, too.

SHWETA KHAJURIA: Yeah, I think that the pre-COVID and even during COVID growth rates are less likely to be repeatable. I see this market growing in the mid to high single-digit growth rate. The reason is because perhaps the-- this company benefits from very healthy retention rates, compared to other subscription businesses.

But at the same time, compared to its prior retention rates, the churn and retention could be getting worse because of the change in their business model. It's slightly impacting the immediate growth rate.

And the second thing, also, is that the market is not as big enough, as we thought, in terms of their ability to penetrate every single household. And that makes us think that if the market is growing in the low to mid single-digit growth rate, Peloton can grow a little bit faster than that. But a double-digit growth rate would be aggressive.

BRAD SMITH: Shweta, I'd love to get your perspective on what happens when the leadership at Peloton runs out of assets to sell. They mentioned that they tried to sell Precor, couldn't find a good price for it. Facilities to close down, headcount to reduce. So what takes place out of there when you're still looking at a demand environment that's saying, well, why do I need a new clothes rack to put in my house? And I can essentially just get a gym membership somewhere else or get another type of connected fitness device.

SHWETA KHAJURIA: Well, we are looking at fundamentally a more attractive business with potentially a leaner business structure, positive free cash flow, and a very healthy subscriber base. And so the-- you know, do I think that the company will be a stand-alone, large, you know, mega-cap stock sort of a name? No, I don't.

I think that their exit strategy would be to make me an attractive business for a potential buyout, for example, where they still have very healthy subscription base. Contribution profit is 70%. About $1.2 billion in contribution profit. With a healthy subscriber base, you could pay, you know, four or five times that, and that still becomes an attractive business. And so that in itself could be an exit strategy for them down the road.

BRIAN SOZZI: Is there one company that you think really would covet a Peloton that after all of their cost cuts, profits are starting to improve, to your point, they have subscribers. Is there one or two companies that you think Peloton may be sold to?

SHWETA KHAJURIA: That would be pure speculation. And I would like to steer away from that. But what I've read in the media and other reports is, you know, it could be varying range of companies, from Nike to Apple or it could be a private equity firm coming in and turning it around. But so a range of outcomes, but they all seem, according to sources, as potential candidates. Now-- sorry, but there could be some regulatory issues depending on which company we're talking, so keep in mind.

JULIE HYMAN: Yes, definitely a good caveat. But a lot of different routes that Peloton could take. Evercore-- sorry for the pun. Evercore ISI Director of Internet Equity Research Shweta Khajuria, thanks so much for joining us. We appreciate it.

SHWETA KHAJURIA: Thank you for having me.