Summary
- PTON's +434% 2020 performance on the backs of pandemic, stay-at-home boosts could repeat during 2021 with another strong year possible.
- CF subscribers have risen at a triple-digit CAGR historically and could be set to do so again in FY21, rising from 1.09 million to 2.2 million or more.
- PTON has strong engagement numbers and a deep content moat, with more content added weekly.
- International expansion from new product launches and the Precor acquisition setting up commercial expansion provide long-term synergies.
- Affordability, churn and focus on CF sub growth over profitablity are some risks, although valuation could sustain a 20x sales multiple to $80B.
The third best performer in the NASDAQ 100, notching a 434% gain on the year, Peloton (PTON) shined as one of the top 'stay-at-home' plays during the pandemic, as demand surged for its home workout products. Peloton's stellar revenue growth and subscriber growth aiding robust unit economics looks poised to continue, aided by the Precor acquisition and new product launches paving international revenue growth, although long-term churn and near term premium valuation remain key risks to be aware of heading into the start of a semi-vaccinated environment. Peloton's top 2020 performance on the backs of pandemic, stay-at-home boosts could repeat during 2021 with another strong year possible.
Peloton has risen 80% since identification of more upside potential ahead of the FQ4 report in early September, as more growth within revenues and subscribers has materialized through FQ1 '21 and looks set to continue throughout the remainder of the fiscal year, with heavy sales (up to nearly $1.1 billion) ahead for FQ2 on the backs of seasonal holiday strength.
For fiscal Q1, Peloton reported total revenues of $757.9 million, with 79.4% of that stemming from Connected Fitness products, and the remained from subscriptions. Revenues grew 232.4% YoY, and 24.8% QoQ, driven by the 274% YoY growth in product revenues and 132.9% YoY growth in subscription revenues. Q1's revenues (as well as Peloton's internal FY21 guidance of $3.9+ billion in revenues) position the retailer for a seventh straight year of triple digit revenue growth. Customer deposits at the end of Q1 totaled $492.8 million, up 44% from the prior FQ4, pointing to a deep backlog of orders.
Although gross margin for the quarter shrunk ~260 bp to 43.4%, gross profit rose 212.7% YoY to $328.7 million, with CF product volume growth offsetting increasing costs of revenues for that segment. Yet the growth in gross profit albeit on a contracted gross margin, led to positive operating income and positive diluted EPS of $0.20, as opposed to the ($1.29) loss in the year ago quarter. Gross margins could contract another 300 to 400 bp sequentially through FY21 as Peloton's focus lies in driving subscriptions (through high advertising and marketing spend) and not profitability.
In addition to revenue and gross profit growth, Peloton's subscriber and member count continues to expand at a quick pace, in line with its goal. Total members have risen to 3.3 million, up 0.7 million in six months. CF subscribers have risen 137% YoY (~771,000 subscribers) to 1.334 million, and 50% (~448,000 subscribers) in the past six months, continuing the triple-digit CAGR in CF subscription numbers. Digital subscribers rose to 510,000 on a 382% growth rate. Peloton noted that "strong demand for our Bike and Bike+, the full resumption of Tread+ sale, and sustained low churn levels" helped push subscriber count higher.
