Peloton’s growth strategy ‘the biggest question’ for investors: Analyst

UBS Investment Bank Leisure, Gaming & Lodging analyst Arpiné H. Kocharyan joins Yahoo Finance Live to discuss Peloton earnings, the company's strategies, and the new row machine.

Video transcript

BRAD SMITH: Pandemic darling Peloton riding a downward trend as consumer behavior shifts towards a new normal. Shares have fallen over 80% in a year, fueling the fitness company's turnaround endeavors. But will these efforts pay off? That's the big question.

For more on this, let's bring in UBS Investment Bank leisure, gaming, lodging analyst Arpine Kocharyan. Great to have you here. First and foremost, let's talk about the rating, I mean, because it's kind of in-sync with what many people have been evaluating more broadly with Peloton. Where, potentially, could they have any type of turnaround strategy, or is that not in the cards right now?

ARPINE H. KOCHARYAN: So for thank you for having me, and good morning. There are a couple of issues that we see today that we need more clarity on from telecoms, but also recognizing that they're still sort of testing out this strategy. So nothing is set in stone yet. And I think at some point, we should get more color on what's working and what's not from the new management team.

When we take a step back and think about what was sold during the IPO of the company to investors, it was this whole flywheel of hardware, business, gross profit covering the customer acquisition of incremental subscriber. Now Peloton is no more focused on that flywheel. Instead, their new strategy is effectively targeting to finance the hardware purchase in exchange for higher recurring subscription revenue.

That effectively means higher upfront customer acquisition costs when the company is trying to reduce marketing spend. So they need to balance higher upfront costs to grow subscriptions against a target of meaningful reduction in marketing spend through 2024, which obviously seems challenging.

And of course, this strategy, I think, still means a fairly capital-intensive business. But of course, when you think about the biggest question that's facing investors, really, is the question of growth, because when we think about their strategy, their new pricing strategy rests on the assumption that an iPhone-type model of financing a phone purchase, to instead have the customer pay for the hardware through a subscription plan, actually expands the market.

And again, our concern is whether this strategy sort of addresses the key demand curve. Do most people need a bike as much as they need an iPhone? Are there more people looking to own a Peloton bike versus a year ago? And the strategy still doesn't answer that question for us.

BRIAN SOZZI: What was your first thought when you saw news this week that Peloton was coming out with a rowing machine?

ARPINE H. KOCHARYAN: It's interesting, right? They've been talking about this for some time. The first step, in my mind, is kind of rightsizing the cost structure to make sure you can sustainably acquire new customers. Second is, of course, increasing the value proposition of a Peloton subscription for existing and potential customers. And that includes both enriching the content library as well as introduction of new products and new categories. And these are all things that they've certainly been focused on.

But I think in terms of significance and what's going to be needle-moving for them, Tread Launch that they did earlier is probably the biggest needle mover in the foreseeable future. And I know there's been this conversation about rowing machine for some time and other new launches. But I think in terms of significance of what could matter over the next two years in terms of demand, it is clearly the Tread Launch.

JULIE HYMAN: All of this said, Arpine, does it make more sense for something like a Peloton to be part of another company in terms of the financials, as you were describing them, and how the company has really reoriented its strategy? Would that make more sense as part of a bigger company?

ARPINE H. KOCHARYAN: Sure. So I can't speculate much on M&A. But definitely, that rationale of a potential transaction involving Peloton remains a key debate among investors that we talked to. And I don't have a specific view on the possibility of a deal happening. But we have generally been of the opinion that a strategic acquirer would need to see value in connected fitness within its own ecosystem of driving higher growth than what Peloton can achieve as a standalone business for a deal to make strategic sense, because we think that the proprietary aspect of what Peloton offers is not necessarily in the tech stack but rather in that prior flywheel of hardware business, financing the acquisition cost of new subscribers with a content library that can clearly be leveraged over time within a bigger install base.

So the question has to drive higher-- so the question is whether the acquisition can drive higher subs growth through a network effect. And I think all of that is not very straightforward in terms of potential candidates. But again, I cannot speculate much on M&A, unfortunately.