New Peloton Price Target With a Plan to Buy After Beating Expectations

"Stocks Under $10" and Sarge-folio holding Peloton Interactive (PTON)  went to the tape with the firm's fiscal first quarter financial results on Thursday evening. For the period ended September 30, Peloton posted a GAAP EPS of $0.03, beating Wall Street's expectations by two cents per share. The firm generated $550.8 million in revenue for the quarter. 

While this amounted to a year-over-year contraction of 6%, this too beat the consensus view. Ending paid Connected Fitness Subscriptions contracted 6% to $2.732 million, but that number also beat Wall Street.

Operations

As revenue dropped 6% to $550.8 million, the cost of revenue dropped 5.4% to $267.1 million. This left a gross profit of $283.7 million (-6.6%) as gross margin dropped from 54.5% to 51.5%. This landed 50 BPS below the firm's guidance due to a $13.5 million accrual for higher Bike+ seat post inventory costs.

Operating expenses contracted by 16.8% to $242.4 million. This left an operating income of $41.3 million, up from the year-ago comparison of $12.3 million. After accounting for interest, other income and expenses and taxes, GAAP net income improved to $13.9 million from a net loss of $900,000 one year ago. This works out to $0.03 per fully diluted share, up from a loss of less than a penny for last year's comp.

Guidance

For the current quarter, the firm is projecting revenue of $665 million to $685 million, which would be good for year-over-year growth of 0.2% at the midpoint. It also takes that midpoint above the $665 million that Wall Street had in mind. Gross margin for the quarter is seen at 49%, up 180 basis points for the year earlier period. Adjusted EBITDA is seen in a range spanning from $55 million to $75 million, which would be up 11% from last year at the midpoint. Lastly, ending paid Connected Fitness subscriptions are predicted to land in between $2.64 million and $2.67 million, a drop of 8% at the midpoint.

Peloton sees full fiscal year revenue at $2.4 billion to $2.5 billion, which at the midpoint, would amount to a 2% annual contraction. This is in-line with Wall Street's expectations. Total gross margin is seen at 52%, which would not only be a year-over-year improvement from 50.9% but is an increase from previously issued guidance for a gross margin of 51%. Adjusted EBITDA is projected at $425 million to $475 million, which would be up 12% at the midpoint and up $25 million from previously issued guidance. The firm also increased its free cash flow target from $200 million to $250 million.

Fundamentals

For the quarter reported, Peloton generated operating cash flow of $71.9 million. Out of that number came capex spending of $4.5 million. This left free cash flow of $67.4 million, up from $10.7 million for the year-ago period. Obviously, the firm is not yet in a position to return capital to shareholders.

Looking at the balance sheet, Peloton ended the period with a cash position of $1.104 billion and inventories of $237.7 million. That makes for current assets of $1.512 million. Current liabilities add up to $795 million. This includes shorter-term debt of $208.7 million and deferred revenue of $140.6 million. That leaves a headline current ratio of 1.90, which is healthy. Adjusted for those deferred revenues, which are not a true financial obligation, this ratio rises to a rather muscular 2.31.

Total assets amount to $2.17 billion. This includes small entries labeled as either goodwill or other intangibles that are barely worth mentioning. That is not an issue for this balance sheet. Total liabilities less equity comes to $2.517 million. This does include convertible senior notes of $343.9 million and a term loan of $946.1 million. That's longer-term debt of $1.29 million, which is a bit much relative to cash, but not at some unheard of level.

Overall, though I am not in love with the debt load, this balance sheet is stronger than most folks who do not follow the company probably ever expected. The current situation is quite strong, without having to make any qualifiers in stating that.

My Thoughts

I am somewhat impressed with the execution at this firm and the methodical improvements we are seeing across a number of metrics. Unfortunately, sales continue to work their way lower. Is at-home fitness no longer much of a thing? I still ride a spin bike at home several times a week. I guess many folks do not.

That said, margins are set to improve. Cash flows are gaining upward momentum and are starting to be something I can refer to as impressive. On top of that, while there's still some leftover debt bloat from prior management, this balance sheet is not bad at all and getting better. ​

The bad news is that PTON surrendered its 200-day SMA on Thursday, which probably forces some portfolio managers to either exit the name or reduce long side exposure. You can tell by the increased trading volume that professional money was on the move. The indicators are kind of gross as well. relative strength is weak without yet being technically oversold. Below the chart, the daily MACD is in pretty rough shape.

Within that item, the histogram of the nine-day EMA is in negative territory and has been with only a brief exception for more than a month. The 12-day EMA is also below the 26-day EMA with both of those lines below the zero-bound. Technically, this is about as bearish a short- to medium-term set up as you will find.

Panic? Nah. You see that falling wedge? That's a pattern of bullish reversal and it came out of a rising wedge pattern of bearish reversal that worked like a charm. 

Bottom line? I bought some of these shares on Thursday on weakness and if I get my chance on Friday morning (I have to wait until I am published and my information is public, so I can't front-run my own articles), I will do so again.

Peloton Interactive (PTON)

Target Price: $9.50

Pivot: 200-day SMA (currently $7.20)

Add: Now

Panic: Loss of the April low ($4.63)

At the time of publication, Guilfoyle was long PTON equity.