Peloton surges on hopeful Q3 outlook, others point to 'eroding' subscriber quality

By Scott Kanowsky

Peloton Interactive (NASDAQ:PTON) Inc (PTON) shares gained 17% intra-day Wednesday after the company reported second-quarter results that beat on the top-line and unveiled a third-quarter revenue forecast that was largely stronger than anticipated, as Chief Executive Officer Barry McCarthy aims for an "epic comeback" for the connected fitness company after a protracted era of restructuring. While investors are cheering the less dismal outlook and more upbeat comments, others have pointed to a potential for "eroding" subscriber quality as subscription revenue declined for the first time even as subscribers rose.

In a statement, the firm said it now expects current-quarter total sales to be in the range of between $690 million to $715 million. Bloomberg consensus estimates had pegged the figure at $693.9M.

However, Peloton flagged that it predicts that connected fitness unit sales will slip following a bump in demand during the holiday season and an easing in promotional activity.

"As with last quarter, we believe macro-economic uncertainty is impacting consumer spending patterns and that near-term demand for Connected Fitness hardware is likely to remain challenged," the group said.

Peloton had seen sales surge during the pandemic, as customers stuck at home searched for exercise options. The strong performance brought its market value to almost $50B at one point, more than four times its initial public offering valuation in 2019.

But even as the firm grew, costs surged as well. This trend began to weigh on the company's results when most pandemic-era restrictions were lifted, leading to mounting losses and eventually sharp job cuts.

McCarthy, the former head of finance at Netflix (NASDAQ:NFLX) and Spotify (NYSE:SPOT), was brought in to enact a broad turn-around of Peloton. He has subsequently reduced costs and made partnerships with Amazon (NASDAQ:AMZN) and Dick's Sporting Goods (NYSE:DKS).

In the second quarter, Peloton's net loss narrowed to $335.4M in the three months ended on December 31 from a decline of $439.4 during the corresponding period in 2021. Negative cash flow from operations was also reduced to $88.5M, beating expectations of $90.3M. Revenue in the second quarter was $792.7M, beating the consensus of $710.45M.

Citing the earnings, McCarthy said that questions around the future viability of the company have now been "put to bed."

Meanwhile, analysts at Goldman Sachs (NYSE:GS) said the results showed that Peloton's revamped executive team is "laying out clear objectives to return to growth via the digital app, international growth and subscription products."

BMO Capital's analyst was not impressed with the results. He noted that while revenue beat, gross profits missed with management flagging extended equipment promotions to drive revenues. Further, while subscribers rose, subscription Revenue "actually declined for the first time." The analyst said this show "potentially eroding quality of sales/subs and continuing to raise the question as to whether PTON has eclipsed its core-and-committed potential user base."

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(Article originally published at 9:21am ET (14:21 GMT)).