Valuentum Exclusive Analysis for the Discerning Investor

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Image Source: Peloton Interactive Inc – Second Quarter of Fiscal 2021 Shareholder Letter

By Callum Turcan

The outlook for the world economy, keeping near-term headwinds in mind, remains bright as global health authorities are actively working towards putting an end to the coronavirus (‘COVID-19’) pandemic largely through ongoing vaccine distribution efforts. As vaccine production scales up, widespread distribution efforts will become a much easier task. We’re continuing with our earnings commentary in this note by covering a social media contender and an upstart exercise company.

Pinterest (PINS)

On February 4, social media contender Pinterest Inc (PINS) reported fourth quarter earnings for 2020 that beat both consensus top- and bottom-line estimates. Most of Pinterest’s revenues come from its digital advertising business, and the industry has proven to be incredibly resilient during the past year. Pinterest added over 100 million additional monthly active users (‘MAUs’) to its operations in 2020 which helped drive up its GAAP revenues by 48% and its GAAP net income higher by 91% year-over-year last year. Pinterest notes that its adjusted EBITDA margin (a non-GAAP metric) grew from ~1% in 2019 to ~18% in 2020 as its adjusted EBITDA surged higher by over 1,700% last year versus 2019 levels, with economies of scale being key here.

Pinterest now has more than 450 million MAUs, and while the social media firm did not provide full-year guidance for 2021, management noted in the press release that Pinterest expects its first quarter revenues “will grow in the low-70% range” versus year-ago levels. The company intends to continue investing heavily in growing its business going forward, a process that Pinterest noted would involve headcount growth with an eye towards supporting its international expansion efforts. Additionally, Pinterest aims to improve the measurement of its digital advertising operations via meaningful R&D investments (so Pinterest can offer its advertising partners a more targeted and effective product).

Shares of PINS initially popped higher after its latest earnings report and we can see why. Economies of scale and impressive active user base growth supports Pinterest’s long-term cash flow growth outlook. The top end of our fair value estimate range for PINS sits at $94 per share.

Peloton (PTON)

Exercise equipment and fitness subscription service upstart Peloton Interactive Inc (PTON) reported second quarter earnings for fiscal 2021 (period ended December 31, 2020) on February 4 that beat both consensus top- and bottom-line estimates. The company’s GAAP revenues and GAAP gross profit more than doubled year-over-year during the first half of fiscal 2021 due to surging demand for its exercise bikes and digitally-provided fitness subscription services.

In conjunction with its latest earnings report, Peloton raised its full-year guidance for fiscal 2021. The company now expects to generate $4.075+ billion in total revenues and $0.3 billion+ in adjusted non-GAAP EBITDA this fiscal year. Rising recurring revenues are key as Peloton aims to exit fiscal 2021 with 2.275+ million in ‘Connected Fitness Subscriptions’ which is up sharply from ~1.67 million Connected Fitness Subscriptions it had at the end of the fiscal second quarter (which were up 137% year-over-year during this period).

According to the company, Peloton is benefiting from strong demand for its fitness services from both its installed hardware base (households with its exercise bikes) and from customers seeking standalone digital packages. Peloton also noted that its ‘subscription gross margin’ stood at 59.5% during the first half of fiscal 2021, up from 57.1% in the year-ago period, highlighting the very lucrative nature of these offerings and the impact operating leverage can have on its financial performance as the number of users grow.

Peloton noted that its consumer churn rates are expected to stay relatively low for the foreseeable future, and that per subscription, the average number of monthly workouts is on the rise (indicating its customers are increasingly utilizing its offerings). Though some of this is likely due to households staying indoors for prolonged periods of time due to the ongoing COVID-19 pandemic, it does appear that Peloton is building up a sizable customer base that is dedicated. Recurring revenues provide for significant cash flow visibility, which over time (if scale is achieved), can result in an impressive cash flow profile. However, it remains to be seen if these subscribers will stick around once global health authorities get the pandemic under control (allowing pre-pandemic activities to resume).

Shares of Peloton initially sold off after the firm published its latest earnings report as the company warned it was having trouble keeping up with demand. Last month, we published our Peloton Makes a Bet on US Manufacturing article (link here) that covered the company’s domestic manufacturing ambitions which should eventually help Peloton stay on top of ample customer demand for its exercise bikes. Management had this to say regarding Peloton’s manufacturing hurdles in the firm’s fiscal second quarter shareholder letter (emphasis added):

On December 21, 2020 we announced our agreement to purchase Precor, one of the world’s largest commercial fitness equipment providers. Precor has long been a leader in the commercial fitness industry and brings substantial domestic manufacturing capabilities and a deep bench of R&D and manufacturing talent to Peloton. With Precor we see an opportunity to accelerate our plan to produce Peloton products domestically and further enhance our consumer and commercial offerings [we covered this news in detail in our aforementioned Peloton article].

The ongoing COVID-19 pandemic continues to present a challenging operating landscape, and we continue to work to address long order-to-delivery timeframes. However, our supply chain investments over the last several months are helping us better match our supply and demand going forward. Our manufacturing output has significantly increased, and we’ve officially begun ramping up production at our new Shin Ji factory in Taiwan.

Unfortunately, well-publicized West Coast port delays and COVID-related factors continue to present challenges to returning our delivery times to pre-pandemic levels. We are making substantial additional investments in the near-term to address our extended delivery times and are hopeful that an acceleration in vaccine distribution and the broader opening of our economy will provide a tailwind to our efforts over the coming months.

We are keeping an eye on Peloton as it struggles with growing pains. In the long haul, Peloton’s outlook appears bright if its current growth trajectory can be maintained, particularly as it concerns its subscription base. That might prove to be a difficult task when households around the world are able to freely go outdoors again, however.

Concluding Thoughts

Pinterest and Peloton continued to grow at a brisk pace during the final months of 2020. The digital advertising market remains robust and digitally-provided fitness services appear to be in high demand. We are not interested in adding either firm to any of our newsletter portfolios at this time as we currently like existing constituents, including Facebook (FB) and Alphabet (GOOG).

Pinterest's 16-page Stock Report (pdf) >>

Tickerized for PINS, PTON

Other: SNAP, TWTR, NLS, LULU, CLUB, UA, UAA, PLNT, FIT, NKE, ADDYY, ADDDF, WFH

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Callum Turcan does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.