Peloton was downgraded by Goldman Sachs on concerns over shipment delays and near-term opportunities already priced in, although it remains bullish long-term. The firm expects strong earnings results when Peloton reports on November 5, and anticipates the company to report 276k net adds, above its guidance of 229k-239k.
Video Transcript
MYLES UDLAND: All right, welcome back to “The Final Round” here on Yahoo Finance. Time now for our call of the day. And today, we’re talking about Goldman’s latest note on shares of Peloton. The firm downgrading the stock to neutral from a buy rating. The firm still has a $140 price target on shares.
And of course, why wouldn’t Goldman come out and say that we think Peloton is not really– there’s no case for it to be continually added to portfolios? And they say right here in the top, since they added the stock to their America’s buy list, Peloton shares are at 458%. The S&P 500 is up 14% during that time. So Heath Terry and the team over at Goldman taking the opportunity to downgrade the stock.
And I do wonder, thinking about Peloton from here, Melody, we go back to what we heard from Netflix on Tuesday night, where Netflix is saying, well, we pulled forward a ton of demand early in the year, and we’re going to see slowing growth. Now, Peloton is not really on that trajectory at all. But I think it’s maybe where investors could fear the story might head over the next couple of years.
And obviously, given how successful the stock has been– the run-up that we’ve seen– it would make sense for there to be, perhaps, a slight pullback. But they do feel like that’s the main risk here for Peloton, not this quarter, but really over the next couple of years, as they try to deal with post-pandemic life.
MELODY HAHM: And that fear, relatively speaking, is a beautiful position to be in, right, the fact that the stock has been up 458% since Heath Terry added this stock to the buy list exactly a year ago. I think it was October 21, 2019. That is sort of a privileged position, right, especially during this coronavirus pandemic, to feel as though you almost ran too hot for the past year.
I think a Netflix comparison is a right one, especially, as we’ve discussed, the story has changed. We’re on another chapter of the discussion. The high-flying growth period is still in the backdrop, but the central piece of the conversation is actually more about sustainability, right? What is a level that actually makes sense?
I do think that Terry’s is now is trying to bring it back down to earth, that it cannot continue in this sort of accelerated way, especially when you look at the demographic that it’s trying to appeal to, even with the price cuts that have been implemented over the last couple of months. So I do feel as though– you know, the Port of Los Angeles supply chain disruptions, that continues to be an existing issue. But I do feel as though Terry makes a good point that demand can’t possibly keep up with the levels we’ve seen during the pandemic.
DAN ROBERTS: It’s interesting, too, guys. Let’s make sure we draw the distinction. And roof! We hear Melody’s pup there in the background. That’s fine. But while I was looking over this note and thinking congratulatory thoughts about our host Myles Udland, who, in case anyone just tuned into the show right now, just got back from his wedding. So congrats to Myles Udland, our co-host, newly married.
While I was looking over this note, you know, I was struck by the fact Goldman isn’t bearish on Peloton now, and in fact, sounds pretty excited about where things are going to go. It’s just a matter of the stock getting a little bit high– really, a lot of it high– that, you know, even if sales growth continues at this pace, it’s unlikely to really go much higher. And I think that’s fair.
And I think it’s important we draw that distinction. Because sometimes, you see a headline about, you know, a note like this. It’s a downgrade. You think, oh, well, you know, what should Peloton investors be concerned about? It’s really just a stock issue.
In fact, they expect, you know, the adoption curve to continue for the connected fitness products. I think there’s also a reason for bullishness, even among people who already bought one of the bikes, because we know that there’s a whole ecosystem. I’m sure you’re going to start to hear Peloton use that term, which is a term I’ve heard them use on earnings calls in the past, even more so. It starts to feel like Square, doesn’t it? The ecosystem.
You know, you’ve bought the bike. Fine. But can we sell you on the treadmill or can we get you to subscribe to this additional new subscription service? Fine. So all that being said, you know, the pull forward in demand, which has become really such a hot debate– early in the pandemic on this very hour, we were talking about a note after Peloton had put out some sales figures that basically said, uh-oh, this is a pull forward in demand. Then, they came out with their most recent earnings report, and it started to look like, mm, it wasn’t just a pull-forward, because they’re still seeing doo, doo, doo, doo, doo, doo, doo, doo.
And so, you know, maybe that wasn’t really a fair concern. Now, we start to think, OK, maybe it’ll slow down. But I don’t see it as similar to Netflix, just in the sense that Netflix really is a fair example, to me, of the pull forward in demand. You know, first half of 2020, they got a ridiculous number of new subscribers, more than they got in all of 2019. Now, it slows down because all those people who hadn’t subscribed yet– and by the way, we always say, gosh, if you haven’t subscribed to Netflix yet, well, when are you going to? And the answer was, during the pandemic. So there was a full forward.
Peloton, I’m still not convinced. I think that momentum could really continue. So sure, a downgrade, but a pretty positive bullish downgrade on the near future for the company and for its sales.
MYLES UDLAND: Yeah, well, you know, the firm still has a $140 price target on the stock is trading 120 bucks. So yes, some implied bullishness there. But quickly, just on the ecosystem point, let’s check in with our official Final Round Peloton user. That’d be Seana Smith.
And Seana, we discussed this earlier today. You just like the bike. You’re not really in the ecosystem, yet. But I suppose that Peloton sees plenty of opportunities to bring you closer to the family.
SEANA SMITH: No, I’m getting there. Having a one-year-old, you aren’t able to do as many things as maybe you were before you became a parent. So it’s been a slow progress and slow adoption. But I mean, once you get a Peloton, you get why it works. And you get the addictive nature of it. And you get the strength, I think, of the ecosystem, as you would if you were an Apple user, because you just want to continue buying those products.
So I certainly see what the differentiating factor is with Peloton. And I think that’s been proven in its sales and it’s proven even in these forecasts that we’re getting from Goldman Sachs. Because even though they’re saying that a lot of this short-term– short-term success is already priced in and the near-term opportunity is priced in at this point, going forward, certainly the trends are still intact. And they’re trending in the right direction.
They have a couple of charts in here that are pretty interesting, just in terms of global app download growth. That continues to remain elevated. Peloton Media spend is still extremely low. That’s been a trend here since April and May. And that, of course, obviously, it continues to help their margins.
I think the biggest issue for Peloton– and we’ve talked about this so many times over the last couple of weeks or last couple of month, I guess you can say– is just their shipment delays. And they haven’t really been able to offer a quick fix to this or really a solution on any level. Of course, some of the congestion recently, just due to the LA ports, is kind of outside of their control.
But when you take a look at how long some of these potential customers are going to have to wait, they’ve already been waiting 10 to 12 weeks for their bikes. They could wait another five to six weeks, potentially even pushing it all the way into 2021. So that, of course, is a headwind here for the company.
But I think overall– clearly, Goldman downgrading this to neutral, $140 price target. But I think, overall, just the tone of this note, you can still see that there are very, very positive on Peloton’s future.
MELODY HAHM: One thing I want to point out that I was just thinking about, especially as Jony Ives has struck this partnership with Airbnb. Of course, Jony Ives was the head designer of Apple, was there for almost 30 years, essentially driving all of the innovation and the kind of beautiful blending of form and function that Apple has now become known for. I just want to point out that every company seems to be going in this direction that we seem to be doing well, whether that’s Airbnb trying to come up with its own product lines, perhaps its own furnishings. We don’t know exactly what that collaboration will look like.
But I think Peloton, especially as John Foley’s wife is actually the head of apparel at Peloton, they’re trying to become more aggressive, right, when it comes to these additional revenue streams. It cannot be seen as a one-trick pony. For so long, we talked about Zoom in the same breath, that, oh, you know, they’re doing great just with their video services. What’s been made very clear is investors, consumers, analysts, they need more. What came out of Zoomtopia? They will be a portfolio of products in the working space basically for everyone.
So it’s just a fascinating trend to be seeing that– specializing in one area, that’s great to start. That’s great to, you know, be strong with your brand identity. But eventually, you do have to evolve. And I do think, like, Peloton is pursuing that route. And we should expect that continued sort of momentum in the years to come.
DAN ROBERTS: And guys, one final note, speaking on the evolution there. We were just talking about the potential ecosystem here. Seana, as an owner of the bike, someone who they want you, Seana, to get more into the connected social aspect of Peloton– what’s interesting to me, just in the past week, I started seeing ads on TV that I hadn’t seen before for Peloton with the angle of interest groups.
So you saw someone on the bike, and it was soccer dads. And then, there was a different group. And it was like, you know, I mean, Irish people of Peloton– whatever the group is. And I didn’t even know there was a thing. But it’s interesting to note, it’s a similar tack to the advertising that Facebook was doing within the last year, really pushing the idea of Facebook groups and, you know, someone finding help via the Facebook group for amateur roofers. I need to replace a leak on my roof.
And it’s interesting with Peloton– of course, I just looked this up. Here’s a “Hollywood Reporter” story from a few months ago. They were all over it, talking about how during the pandemic, big name Hollywood producers were gathering for Peloton group rides, including gathering with rivals at other studios. So you know, there’s a whole subculture here is my point. And I think it’s one of those things that is highlighted in this note– the idea that even once you have the bike, well, that’s kind of just step one. Now, you’re in their world. And they’re going to try to really entrench you mentally, emotionally, socially in the Peloton friends’ circle. Yes,
MYLES UDLAND: I believe that was a reference to Usher’s “Love in This Club,” Dan. Thank you.
