Yahoo Finance

Let's get to our top trending tickers today. We've got to start with Peloton here. Shares of PTON, they are in rally mode. The company ending an over two-year streak of revenue declines, slashing its overall losses. It's been a rough go of it, rough ride, if you will, for Peloton to say the least. Shares have fallen over 40% this year and demand for the company's products have taken a massive hit since the end of the pandemic. Let's bring in Bernie McTiernan, who's the Needham Company managing director for analysis. Bernie, thanks so much. I mean, you're fresh off the call. What did you hear from these executives? What's what's the vibe, if you will, of how they're navigating this environment right now?

Yeah, well, I think the key is is part of the setup and what you mentioned, the stock down 40% year to date. So, there was definitely some balance sheet and liquidity concerns. Um, the company shored up the balance sheet in May with some refinancing and then they just announced, um, e done free cash flow targets, double of what the street was expecting. So, I think that's why this you're seeing the stock react positively. What's interesting though is that they're still guiding to, even though they got to revenue increase in the in the fiscal fourth quarter, they're still guiding to a 9% decline in revenue and 9% decline in subscribers in 25, as they're looking to optimize that LTV to CAC equation. But, um, you know, again, I think it's the the doubling of the e versus expectations, doubling of free cash versus expectations is what when is winning out in the market right now, given those, uh, prior balance sheet and liquidity concerns.

So, Bernie, what what does Peloton need to do in order to keep this momentum, right? And and that is the multi-million dollar question that so many investors are acting are asking themselves right now. And even, I'm sure, just with inside Peloton as they search for that new CEO, is there enough confidence, do you think, from the street that they are going to be able to maintain that momentum? And what does that turnaround then, more I guess more specifically, down the road look like?

Yeah, well, that's why, you know, generally, margin beats aren't treated very favorably by the street. And so, I mean, the key is getting revenue back to where, um, the true directory of where, you know, Barry McCarthy, prior CEO, was was looking forward, where he was willing to take the margin hit near term to to really grow that subscriber base and and gain enthusiasm. Um, and so, that's what the company's working on right now is is basically opposite, is really trying to refine that LTV to CAC equation because ultimately, this business can't be, you know, declining 10% revenue growth forever. Um, they need to get back to growth at some point. They did mention the macro weighing on their outlook. Um, and so, I think that's that's ultimately the key. There was some green shoots though. They they talked about tread revenue was actually up 40% year over year, um, in the in the fiscal fourth quarter. So so that was certainly great to see. So, I think it's finding these green shoots and these pockets that they can go after, waiting for the connected fitness market to continue to come back. Um, and again, all all the while, refining this LTV to CAC equation, making sure that they're they're on sides here when they get back to growth, because they did say LTV to CAC right now, one and a half times. Um, they want to get that back to two to three times where they've historically been.

Bernie, when we're talking about the new CEO, from the street's perspective, any ideas just in terms of internal versus external candidates or or what more specifically investors are looking for in that new leader?

Um, I mean, it's tough to say. We'll have to see. The the commentary we did get from the company is that they are making progression, there's lots of demand. I'm assuming it's an outside candidate, but to be honest, um, they they haven't discussed much much of it. And so, what would the street be looking for? Um, you know, look, this company has to show free cash flow growth, has to show continuing margin expansion. And then you need a growth strategy as well, too. So, it's really threading that needle, which is difficult to do when the when the end market for this company has been so treacherous really over the past two plus years.

Bernie, are are the rise of what I see on social media, what I see among friends in in the run clubs and the biking clubs, and these more social constructs for exercising, is that a potential and I I don't want to say this. I hesitate to say this, but is that a a Peloton killer right now?

Yeah. No, look, it's a it's a good question. Um, you know, and and there are certainly companies like Whoop and Aura where there is some sort of a network effect where, you know, you have, you know, friends checking their sleep scores and whatnot. Um, look, at the end of the day, I I still think that connected fitness at home working out, it's it's cheaper than many other options. I mean, if you think about, you know, $45 subscription versus a $45, you know, Barry's Bootcamp class, getting that subscription for the month is pretty powerful. And also the amount of time that you save too. So, um, you know, I'm I'm still one of the, you know, one of the three million Peloton, um, connected fitness subscribers. And I just think about the amount of time and money that I'm saving. But certainly, there's other options, um, coming about here, but Peloton is clearly, you know, what's their network effect? It's the fact that they can, um, it's the amount of content, it's the quality of the content that they have too. And ultimately, we've seen that win out in other other industries and we think that, um, you know, that should ultimately win out in fitness as well. But also, you know, this is just a a tough go for the company at this moment in time.

Bernie, you and me both. I'm still one of those subscribers and it does save you a lot of time and a lot of money, certainly when you compare it to Barry's or some of those other classes that cost a lot more. All right, Bernie McTiernan, thanks so much. Always great to get your insight, Needham Company's managing director for analysis. Thank you.