Why Peloton Stock Is Up

In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Bill Barker about the latest earning releases. They first look at digital transactions and how they are growing as people move away from cash. Next, they go through a couple of food delivery services and discuss the working-from-home economy and much more. They wrap up by talking about Peloton.

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This video was recorded on May 7, 2020.

Chris Hill: It's Thursday, May 7^th. Welcome to MarketFoolery. I'm Chris Hill, joining me, the one and only Bill Barker. Good to see you.

Bill Barker: Good to be here.

Hill: Earning season just continues to roll along. We're going to talk about the delivery economy, the working-from-home economy. We're going to start with the war on cash. And at the moment, cash needs to call a timeout, because cash is getting its butt kicked. Square (SQ 5.04%) and PayPal (PYPL 2.01%) both out with first quarter reports, both stocks up more than 10%. And it seems like this was less about the results that Square and PayPal delivered in the first quarter and more about the way everyone is thinking about non cash payment businesses.

Barker: Yeah, I think that that's fair, they're interesting reports, and this is certainly not only them, but Lyft (LYFT 1.08%), for instance, or PayPal's report, sort of, breaks down results into the January-February period, and then the March period, and then the April period, and then the go-forward period. So, when they talk about rapidly evolving business situations, and many other companies are in the same boat, where there's a pretty happy story to tell according to the numbers for January-February, and then a big change in March, and then maybe a stabilization for these companies in April, and then just -- we don't know what's going to happen going forward.

Hill: Right. That's true of all businesses. You know, that pretty much -- if there's one thing, one unifying thread through every one of these conference calls, regardless of the business, it's people saying, "Yeah, but we don't really know," which is totally understandable. But in the case of PayPal, I totally understand why they are eager to talk about the current quarter. It's like, "Yes, here's our first quarter report, but once we're done with this, let's talk about what's happening in Q2 because what we're seeing is pretty exciting stuff."

Barker: Yeah, they're seeing, I think, 250,000 new subscribers a day, something like that, is the pace they're on right now. I think May 1^st was the largest increase or the largest number of new users they've ever had. This is an acceleration of the future, really, you've covered it, you've thrown the war on cash name around it, people have been following it. And this accelerates what has been going on to cash and where it's going and PayPal has been one of the principal beneficiaries of this, a little bit more so than Square over the last quarter, but they're both enjoying very nice days as stocks.

Hill: Yeah, and I think Square is more reliant on small businesses in a way that PayPal isn't. I mean, just for anyone who's been to a small, independent shop or a farmer's market or something like that where, you know, you walk into a tent, you think about buying whatever they're selling and they've got the little Square thing that you swipe right there. So, I mean, that's probably putting a little bit a dent in their Q1 numbers, but I don't know, I mean, it's hard to imagine Square not succeeding over the next five to 10 years.

Barker: Yeah. It's the little white square boxes where you swipe your credit card, that you come to know, and perhaps love, perhaps not love. I mean, I have discovered when I am operating with any sort of Square interaction that there's a new opportunity to tip somebody at the counter for something that, in almost all other circumstances, I don't find myself tipping for. This option to just, "Would you like to just go ahead and add, I don't know, 10%, 15%, 18%, 20% on to that?" Which doesn't occur everywhere else, but it's just enough of a prod to guilt me into doing that often.

Hill: And you didn't give specific examples, but it sounds like you're talking about, "Hey, if I'm in a coffee shop, yeah, if I had some change or whatever, I'd throw that in the tip jar." "If I go to an independent bookshop, I'm not necessarily [laughs] looking to tip the person I'm buying the book from."

Barker: No. And yet here's Square asking me whether I might consider that. So, the little Square devices aren't getting as much business in an era where people are not going into the little small shops, but the cash app is doing good business for them. And competitor to Venmo, and you know, all the money that you probably owe me, for instance, you can use either of those two methods. Oh, you don't owe me any money at the moment, do you?

Hill: No, what are you talking about? I don't owe you money! [laughs]

Barker: [laughs] You weren't in that poker game the other week, that was Bill Mann. Bill Mann owes me $20.

Hill: Yeah. No, I did hear that you were the person walking away with the money. Yeah, and now you don't even have to see Bill Mann, you can just, like, send him a message on Slack and just be, like, "Hey, man, Venmo me, [laughs] give me my $20."

Let's move on to the delivery economy, and help me understand this, because we're going to get the first quarter results from Uber (UBER 2.64%) after the closing bell today, but we already got first quarter results from Lyft and Grubhub. And on the surface, it would appear as though Grubhub had the better first quarter results, and yet, because they broke-even and everyone was expecting Grubhub to report a loss. And Grubhub shares are down 10%, 12%. Meanwhile, Lyft, that stock is up more than 20% this morning. It's still down for the year, but maybe it was the benefit of low expectations, but first quarter revenue for Lyft was up 23% compared to a year ago.

Barker: Yeah, well, there's a difference between a stock that is up 23% to get back to about half of the price it was a couple of months ago, and the stocks like PayPal and Square, that are approaching all-time highs off of, you know. Perhaps some of the earnings expectations changed around their stories. I think for Lyft, things have improved over yesterday mostly in the sense that the company is reported it's going to save about $300 million a year on a run-rate basis on its operations by scaling back on some of its expenses. So, that's the better part of the story there. Really, the numbers declined, of course, precipitously in March and continue to be in April over where they were in January and February, but yeah, the company was showing pretty strong growth going into the beginning of this. For the whole quarter, 23% increased revenue for the quarter and that's completely on the back of the strong first two months.

Hill: It seems like every quarter when Home Depot comes out with their results, Lowe's comes out the next day and it's almost always similar but not quite as good. I don't know if we have enough data because Uber and Lyft haven't been public companies nearly as long as Home Depot and Lowe's, but should we look at Uber reporting after the bell today and think, "Oh, yeah, it'll probably be about what Lyft is doing?" In their version.

Barker: Absolutely. Yeah. And in part because Uber has already announced the massive layoffs that were announced yesterday. And that was -- I can't remember exactly how many people it was, but it was massive in terms of the business. So, I think that they'll be able to qualify what the savings from that are going to be. They obviously found ridership way, way off right now. And they've got to find saving somewhere and that usually comes at the cost of employees. So, that is, I think, the reason that it's up today, aside from just mimicking Lyft. I don't know that this would affect the stock price, but the announcement that it is taking in investment in Lime and getting rid of its scooter business and, I guess, combining that with Lime's.

Hill: You know what, I don't know about where you live, but where I live, yeah, we need some consolidation in the scooter business. There were just way too many of them and it's just [laughs] it's like, yeah, no, these aren't all going to survive. So, yeah, the sooner you all can get together and decide which brand is going to survive, the better we're all going to be.

Barker: Yeah. I have not found myself using any of the scooters that are plentiful and available wherever you go around Alexandria. But also getting back to Grubhub down 13% today, I think that the results today, you would have to have believed that if there were a time when Grubhub was going to have a great quarter it would be the one just announced. So, the fact they weren't really able to translate additional orders into additional profitability and have said that nearly all of their profits in the coming quarter are going to be used to generate additional orders for the restaurant partners. Okay, you know, being a good partner with the restaurants, which they have been accused of not being a great partner to restaurants in the past, may be good long-term. But you know, they're a company that you would think, "Well, they must be raking it in right now," and that's really not the case.

Hill: Yeah, this is absolutely one of those times where it's, I think, completely fair for investors [laughs] to look at a business and say, "It's put up or shut up time." If Grubhub can't get it done at a time when there's a national pandemic and people are trapped inside their homes, I'm sorry. [laughs]

Barker: Yeah. [laughs] It may be time to move on. And where, you know, Uber Eats is a legitimate competitor, as is DoorDash, but I think that that will be one of the interesting things to get from this evening's call by Uber, they're going to see the ridership way, way, way down but UberEats will make up some of those losses for the company. And as I say, the other thing that they'll be pointing to is the money that they have been able to save going forward with the unfortunate layoffs that are necessary.

Hill: Let's wrap up with Peloton (PTON 2.46%). Shares of Peloton up 15% hitting an all-time high, although it's only been a public company since last September. But still, a good day for Peloton. Third quarter report, again, not surprising, big jump in sales, big jump in membership.

Barker: Huge, huge jump in sales, I think, up 66%, something like that. And the subscription revenue is up more than that. And this is without one of their principal items really available for sale in most cases. That is, they're better known for the bikes but they also sell what I would deem to be outrageously expensive treadmills; you might be able to comment better on that because you're the ultra marathoner here. And they sell treadmills, which they can't install right now, because they can't go into people's houses and it takes multiple repairmen to construct these things, but they're $4,300; and what do you think about that?

Hill: So, I don't have a treadmill in my home, I have never been interested in having a treadmill in my home. So, I can't say I have a good sense of what a reasonable price for a treadmill is.

Barker: You know why that is?

Hill: I prefer running outdoors, because it's free.

Barker: Yeah, you're from Maine. So, the worst weather that Northern Virginia has to offer you is, like, kind of a joke to, you know, to your make up, right?

Hill: I mean, I'm not a big fan of running in driving rain, but yeah, I'll run 12 months out of the year, sure.

Barker: Yeah. And weaker people than yourself, less hearty people from America, really, are willing, some of them, to spend apparently $4,300 on a treadmill or will, according to Peloton, when they're able to bring these people these devices into people's homes and construct them. In the meantime, the $2,200, $2,500 bikes are going like hotcakes. There's a panic buying apparently according to The New York Times of these. And The New York Times readership probably intersects fairly well with Peloton's subscribers.

So, they've had the largest class in their history 23,000 people in one class, and just all the numbers up-and-down look great. And at the moment, not that they want to rub it in, but nobody is really rubbing it in when they're having a very good quarter right now. They're couching their enthusiasm for results in more muted terms than that. But they are having the last laugh over everybody who was trying to dance upon their graves for their Christmas ads.

Hill: They certainly are. And it's not hard for me to imagine that businesses start to get involved with Peloton. And by that, I mean we're going to see a shift in businesses, where business is conducted. I don't know about you, I'm already hearing from friends of mine who work in Manhattan and they're in situations where a business has got 50,000 square feet of office space in downtown Manhattan and now they're saying, "Well, we don't think we're going to need this anymore, and instead, we're just going to find a couple of smaller footprint places out in the suburbs. Instead of 50,000 square feet, we're going to need about 10,000 square feet." "We're going to shift how we spend money as a business, we're going to be spending less on office space, but we want to make sure our employees are happy, and so, instead of subsidizing their commute, we're going to subsidize their home office."

And it wouldn't shock me at all to, in the next six months, start hearing about businesses that are using Peloton as a way to recruit people.

Barker: Could be, could be. You should do a little PR for them.

Hill: [laughs] I think they're doing fine; I don't think they need me doing PR for them. Bill Barker, good seeing you, thanks for being here.

Barker: Thank you.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening, we'll see you on Monday.