The holidays were very kind to Peloton Interactive (NASDAQ:PTON). The maker of high-end exercise bikes saw revenue jump 77% year over year, on top of nearly doubling its connected fitness subscriber total in the quarter compared to last year.
But investors weren't so kind to the stock. Company shares fell about 15% following the fiscal second-quarter earnings announcement last week. The culprit was a lower-than-expected outlook for the fiscal third quarter, which calls for revenue growth to decelerate to 50% year over year, while subscriber growth is expected to remain robust at 85%.
The outlook for subscriber growth points to continued momentum in the business, so what's the deal with revenue growth? During the call, management outlined two reasons for the soft outlook, which makes the market's knee-jerk reaction look unjustified.
1. Delivery timing issue
In last year's holiday quarter, Peloton experienced tremendous demand, which caused longer order-to-delivery times. This pushed "thousands of deliveries into the third quarter of fiscal 2019," CFO Jill Woodworth explained.
Since Peloton recognizes revenue at the time of delivery, not at the time of order, this sets up a difficult year-over-year comparison for revenue growth in the fiscal third quarter of this year.
Compounding the difficult comparison is that Peloton has gotten faster at fulfilling orders over the last year. Peloton cut the delivery time in half for the holidays. But this had the effect of shifting about 6,000 orders originally expected to be delivered in the fiscal third quarter to the holiday quarter.
Breaking this down, Peloton's strong holiday quarter and faster fulfillment left fewer orders to be delivered in the current January-to-March quarter, and therefore, not as much revenue to be realized as previously expected. This creates a difficult comparison to last year's exceptionally strong fiscal third quarter.
2. Tough year-over-year comparison
Peloton fulfilled a high number of orders a year ago, including most of the pre-orders for the new treadmill, "creating a challenging revenue comparison for Q3 fiscal 2020," Woodworth said. Management estimates that last year's pre-orders for treadmills impacted revenue growth by 10 percentage points.
So, in this year's fiscal third quarter, Peloton will be lapping a year-ago period that saw elevated revenue due to delayed deliveries from the 2018 holiday season, in addition to fulfilling preorders for new products.
Stay the course
Peloton's business momentum is still intact. This was noted by management raising their full-year guidance, now calling for revenue to be between $1.53 billion to $1.55 billion, representing growth of 68% year over year at the midpoint. The number of connected fitness subscribers is expected to fall somewhere between 920,000 and 930,000, an increase of 81% year over year at the midpoint.
The updated guidance is better than the previous outlook, which called for revenue to be up 61% for fiscal 2020, and for subscribers to be up 74%.
Growth stocks can be beaten up by investors when there are hiccups, so investors should be prepared for this as Peloton continues to focus on growing subscribers over reporting a short-term profit.
"We continue to see a massive opportunity in front of us, and we're prioritizing our subscriber growth over profitability," Woodworth said. Management still expects to achieve profitability on an adjusted EBITDA basis by 2023.