MKM Partners Senior Analyst Rohit Kulkarni joins Yahoo Finance Live to discuss third quarter earnings for Peloton, supply chain concerns, rising inflation, and the outlook for growth amid weak demand.
Video Transcript
- Well, Peloton is also running downhill from its pandemic high. And the fitness bike maker's turnaround could take a while. CEO Barry McCarthy warned shareholders that the company is thinly capitalized for a business of its scale.
Joining us to discuss is Rohit Kulkarni, MKM Partners senior analyst. Rohit, if you were on that call, it wasn't the most upbeat, you could argue, given that this company is still very much in transition under new leadership. What was your takeaway?
ROHIT KULKARNI: Yes, very early days of transition. They are trying a lot of new things. They are cutting prices. They are increasing prices on the subscriptions. They are testing bundling offers. They are testing new thing called as fitness as a service. A lot of moving parts while they are trying to control their cost structure. So I think-- and also, don't forget that we are still in reopening mode, high inflation, high interest rate. So this company has caught itself into a whirlpool of micro and macro issues. So we expect this transition to be painful and long.
- As part of that transition, we have heard the company talk about exploring the subscription revenue model, but also looking at offering up their bikes through third-party sellers. I mean, how much revenue do you think that's likely to drive when you consider where Peloton is right now?
ROHIT KULKARNI: Again, I think, typically, e-commerce, direct to consumer brands could drive as much as 30%, maybe 40% of the revenues through third-party sellers. But of course, those third party, be it big brand box stores or you can think of large e-commerce companies, say Amazon or the likes like that, I think they would still be coming at a lower margin. And probably, over the longer term, that's not a very bad thing for a company like Peloton, which is strapped for cash right now.
They do not have sufficient cash to invest in new stores, to drive new foot traffic into those stores. So relying on third-party sellers may be a way to reduce the capital expenditure, but OK to reduce their operating expenses going forward, too.
- In terms of the challenges they face right in front of them, supply chain's certainly no different than what other companies are experiencing, as well. We heard from the executives on the earnings call address that very issue. Take a listen to what we heard.
BARRY MCCARTHY: Today, our bike and tread has to be installed. But a much simpler solution would be we designed it and shipped it in a way that it could be delivered-- delivered by FedEx. You know, you wouldn't have to be home to receive-- receive it and have it be installed, and it would cost significantly less. And it would be much easier logistically for us to launch new international markets.
- Rohit, what do you think about that plan specifically? I mean, how supportive is that likely to be?
ROHIT KULKARNI: It's easier said than done. Again, this is a complicated piece of equipment. This is a complicated piece of equipment that requires personalized, high-end touch and feel, in terms of installation and setup.
So I think there needs to be some technical innovation that the company needs to communicate to investors as to how they may come about doing this. So it, again, in my opinion, remains a show me story. How do they pull about this turnaround? And if this reducing the friction on installation, reducing the cost of delivery is part of the turnaround, I think that's a harder problem to solve, in my opinion.
- The stock is down more than 15% today, hitting a new 52-week low. You've still got a price target we were showing there that is much higher than where it's trading at right now. What do you think could be the catalyst to get there?
ROHIT KULKARNI: Again, the price target remains under review, given the recently reported earnings just today. So with regards to where the stock could go, I think, over the next three to six months, it stays in this penalty box until we see clarity on their cost savings plan, until we see how their restructuring is progressing, and until we see new products and new initiatives that they have tried to introduce, how they shake out.
Longer term, I think there is value in Peloton. There is value in-- with regards to an acquirer looking at Peloton, given their brand name and market leadership in connected fitness. So there are a lot of potential possibilities here. But next six months, from a fundamental standpoint, I think they remain in a black box, they remain in a penalty box until we see progress with turnaround, with cost savings, and just stable financials.
- Finally, Rohit, I'm just curious to get your thoughts around some of the selloff that we've seen, especially in high-growth names. You could argue Peloton getting caught up there. But this is a story that was playing out even before the most recent selloff.
ROHIT KULKARNI: Yep.
- With some of these names that did so well during the pandemic, you said the value is still there. The question is, how do you estimate that value in a post-COVID environment? What do you make of the declines that we've seen from some of these pandemic darlings?
ROHIT KULKARNI: Again, there are a lot of macro factors at play here, to be honest, in terms of there is a mathematical valuation compression, higher interest rates, higher discount rates. If you are burning cash, then your value goes down. That probably account for maybe 20%, maybe 30% of the value compression that we are seeing.
In addition, there are macro headwinds, such as supply chain, inflation, higher cost of goods sold. If you are selling a hardware product, probably you're going to see compressed margins. That is probably adding another 10 to 15 points of valuation compression. And then there is the pandemic pull-forward. Even e-commerce, Amazon is going to decline e-commerce for the first time in two consecutive quarters. Peloton has also had that pandemic pull-forward.
So the pandemic pull-forward and to what extent we go back to the new normal and when we do that, that uncertainty is adding another 10% to 15%. So you add all three things together, the mathematical discount rate correction, then you have the inflation and the other correction related to consumer discretionary spend, and then the pandemic pull-forward. These three things are amplifying issues on growth stocks. And I believe the latter two are going to be solved very soon. And probably that's why we are bullish with all high-growth tech stocks as we get into the second half of this year.
- Yeah, I'd imagine it's keeping you busy in the meantime. Rohit Kulkarni, MKM Partners senior analyst, thanks so much for taking the time today.
