It is actually possible for a company to be too successful. Just ask Starbucks (NASDAQ:SBUX) which found, after launching its online order platform, that people were so eager to use it that it caused bottlenecks at the counter and left in-person orders forced to wait several minutes, often prompting them to leave. Sometimes the problems caused by an excess of success can be addressed with changes in policy or in processes, but sometimes, they can't. Peloton (NASDAQ:PTON) is finding out the hazards of being too successful right now, and it's going to have a tough time addressing the matter.
A Big Win for Peloton
Peloton has been tracking upward lately, especially over the last 24 hours. That's likely prompted by some impressive numbers the company turned in, offering up quarterly sales growth of 2.32%. That growth was prompted mainly by pandemic-related issues, as the market discovers that, despite the fact the gym is now open again in many places, customers would rather stay at home for their exercise.
Peloton was more than ready to accommodate that desire, to the point where the company raised its fiscal 2021 outlook from the previous range of $3.5 billion to $3.65 billion in revenue to somewhere over $3.9 billion. That handily beats analyst expectations of $3.63 billion, and Peloton's actually looking for a killer holiday quarter featuring, for the first time, over $1 billion in sales. The company brought in quarterly revenue of $757.9 million, also beating expectations of $748.1 million Just to top it off, earnings per share (EPS) figures beat expectations as well, coming in at $0.20 over the expected $0.11.
The analysts are looking a bit skeptical as well; in the last month, based on our latest research, the company has gone from one “sell” rating, three “hold” and 25 “buy” to one “sell”, three “hold” and 21 “buy” ratings. Given that the price target has increased from $97.08 to $114.36, however, the declining “buy” recommendations may not be such an issue.
When You're Too Good for Your Own Good
Peloton's numbers were exquisite, and delivered beats on every front. So why did the company lose over 4% of its value in pre-market trading? The problem is that Peloton discovered the dark side of success, as it noted that the company was already having supply problems. In fact, it noted that it would see “supply constraints for the foreseeable future.”
The company is working to counteract these issues, of course; new manufacturing operations are coming online, and new suppliers are likely being sought. But these gains will pressure profits going forward—hard to make a big bottom-line number when you're shelling out big cash to produce more—and with states reopening businesses in the wake of the pandemic, the chances of losing some of that business for good can't be ignored.
Peloton has demonstrated soundly, however, that once it gets a customer, that customer tends to stay. The rate of churn—subscribers who leave—is down from 0.75% last quarter to 0.65% this quarter. Once the current quarter concludes, the total churn should be below 0.85%, which is quite impressive given that the company looks to have 2.17 million subscribers by the end of the year.
Getting, and Keeping, Customers
Peloton is working aggressively to keep those churn numbers low, and has been rapidly generating new content to keep customers in the fold. It's brought out over 2,400 new classes during the last quarter, and brought out both Bike Bootcamp and Barre classes to hold users' interest and keep them subscribing.
Peloton knows what needs to be done to keep customers in play. The content needs to be fresh, and the customers need reasons to keep using those bikes as opposed to just putting them in a corner to use as glorified clothes racks. By doing that, the company can ameliorate supply line issues that may prevent the company from gathering in new customers as fast as it might like and make up the losses on subscription costs. By turning exercise equipment into a subscription option, Peloton has effectively insulated itself from equipment troubles.
Though the supply issues will limit the company's rate of growth, and attempts to protect against those problems will in turn limit profitability for a while, Peloton manages to make itself a worthwhile target thanks to its diversified strategy and understanding of its own constraints. Calling Peloton too successful isn't invalid, but that means it is actually successful. When it understands its position fully, it can work around the problems and continue being successful.
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