Peloton's digital future: 4 looming questions

Peloton said it will spend $100 million to bring delivery times back to about 4 weeks. In the long run, supply chain worries may recede as Peloton may be more of a content and experience company in the future.

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Peloton's second quarter results and third quarter outlook were strong and the company's connected fitness subscriptions show no evidence of slowdowns. But questions loom about the future as one of the COVID-19 darlings faces a new normal.

Indeed, Peloton is a prime example of a digital company that bridges the real world. Consider that Peloton grew connected fitness subscriptions 135% in the second quarter to 1.67 million. Paid digital subscriptions grew 425% to 625,000. Peloton delivered second quarter earnings of $63.6 million, or 18 cents a share, on revenue of $1.06 billion, up 128% from a year ago. For fiscal 2021, Peloton is projecting at least 2.275 million or more connected fitness subscription and $4.07 billion or more in revenue.

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Peloton

Here's a look at the big questions ahead for Peloton.

Will Peloton fix its supply chain issues? Peloton's earnings were strong and the company noted there were no hiccups in demand. But manufacturing capacity is ahead of demand. The choke point is shipping from China, logistics costs, and getting gear to customers in a timely manner.

Peloton said it will spend $100 million to bring delivery times back to about 4 weeks. CFO Jill Woodworth said on an earnings conference call:

There's container shortage. There is extended time of containership sitting out on the ocean, there is a backlog to get those containers unloaded. And so this investment is essentially to circumvent all of those issues so that we can prioritize getting our major warehouses stocked up for us for our third-party 3PL partners. So that we can take down that order to delivery as quickly as we possibly can. At the same time, we're still going to be using standard ocean freight over time, which is our typical model. But we're certainly in our forecast now taking all of these new factors into consideration when we're planning out when that inventory is going to hit.

Is Peloton ultimately a content company? I can't help but compare Peloton to SiriusXM. The satellite radio provider used to have to worry about supply chain, radios, building partnerships, and content. Today, SiriusXM has a car footprint but is frankly more about the content and app.

Now fast forward to Peloton. The company is spending $100 million for supply chain workarounds, bought Precor for more US-based manufacturing, and is solving some big hardware issues.

Yet, I can buy the Peloton app, which by the way is well done, and use my own gear for $12.99 a month. Or, I can pay up for a live connected experience, fork over the dough for a Tread or Bike, and pay a $39 per month membership for the whole household.

In other words, the connected live experience has to be very good for $39 per month. I'm thinking $12.99 is a bargain and falls into the good enough category.

Peloton CEO John Foley said the digital channel is a big lead generation machine. He said:

The conversion from digital members, digital subscribers, to Connected Fitness subscribers is something we do track, something we do care about. It's one of our theses that if we introduce our great instructors and our great music and our great community and our great content and software to members in a very low friction, $12 a month way, and they see what we're bringing and why the experiences on Peloton are different, that they're eventually going to want a Peloton Bike or Peloton Tread. We are absolutely seeing that. It continues to be one of our best lead gen channels, and it's getting better as we get smarter with it.

What does the post-COVID-19 fitness world look like? Peloton had a massive boost from the COVID-19 pandemic. However, COVID-19 vaccines mean more folks will venture into the gym. Peloton's acquisition of Precor gives it manufacturing heft but also serves as a hedge should demand fall for its core services.

Peloton President William Lynch said:

We do research on consumer perceptions around home fitness and going back to the gym, et cetera. I don't know if this is what you're getting at, but as we study the consumer and we have quarterly tracking, and we do bespoke research.

And what's clear is the shift into the home is not a COVID-led phenomenon. It has accelerated it. But we see, if anything, as we emerge to whatever the new normal is that the norms haven't changed. There is a secular shift into fitness in the home.

But in terms of demand for Peloton products and Connected Fitness in the home, we see continued momentum in foreseeable future.

Can Peloton leverage commercial fitness to grow its base? Foley said about Precor:

Precor's product portfolio and sales team will also accelerate our commercial business where we see a significant opportunity to grow Precor's franchise while introducing the Peloton platform to an even greater number of fitness enthusiasts in channels such as hospitality, multiunit residential buildings, corporate campuses and colleges and universities.

As we mentioned in our transaction announcement, we expect to be producing Peloton equipment in the U.S. by the end of this calendar year at Precor's North Carolina facility and expect to close the acquisition early this calendar year. Pending a successful close, we will offer more thoughts on Precor next quarter.