Please ensure Javascript is enabled for purposes of website accessibility

Peloton Has a Very Good Problem on Its Hands

By Evan Niu, CFA - Sep 12, 2020 at 1:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Can the fitness tech company ramp production to meet booming demand?

Last week, Peloton (PTON 13.60%) reported fiscal fourth-quarter earnings results that blew away all expectations, as the ongoing COVID-19 pandemic has created a surge in demand for home exercise solutions. Revenue skyrocketed 172% to $607.1 million, crushing both the consensus estimate of $580 million and the company's own guidance. Connected Fitness subscribers more than doubled to 1.09 million, and Digital memberships more than tripled to nearly 320,000.

That all led to the company's first profitable quarter, with Peloton posting net income of $89.1 million, or $0.27 per share. However, management acknowledged on the conference call with analysts that Peloton is struggling to keep up with demand, but that's a very good problem to have.

Woman running on Peloton's new Tread model in a furnished living room

Peloton's new Tread. Image source: Peloton.

Manufacturing is key

Like the rest of the us, Peloton wasn't prepared for how COVID-19 would change the world. The fitness tech company has been scrambling to expand manufacturing capacity at third-party contract manufacturers and its in-house manufacturing operations. Peloton had acquired Tonic, one of its bike manufacturers, a little less than a year ago as part of a vertical integration strategy.

Peloton exited the fiscal fourth quarter with a significant backlog of Bikes that had been ordered but not yet delivered. That amounted to around $230 million in deferred revenue associated with those products that were in transit, according to CFO Jill Woodworth, which also provides visibility into the coming quarter. "Given where we are in the quarter, plus our significant backlog of Bike deliveries, we have a solid view of our first-quarter results," Woodworth said.

CEO John Foley also noted that the company had to balance the trade-offs with how it allocated capacity. Peloton recently introduced a new Tread that's more affordable, but it also needed to ramp Bike production. Foley commented, "While we had hoped to launch our new Tread more quickly and in greater supply, we had to make some tough decisions regarding supply chain resource allocation due to the surge in demand we've been experiencing for our Bike."

Woodworth also acknowledged that Connected Fitness subscriber growth started to slow near the end of the quarter, but that was largely due to ongoing supply constraints as opposed to a lack of demand. The finance chief also said that the resurgence in coronavirus cases over the summer contributed to another spike in demand:

However, the unexpected increase in COVID-19 cases in many states starting in late June had sustained the imbalance of supply and demand in many geographies for us. This has made it challenging to meaningfully reduce our order to delivery time frames in the US. While we have materially increased our production capacity in recent months and continue to grow our manufacturing capabilities, we do not expect to return to normalized order to delivery windows in the U.S. prior to the end of Q2 fiscal '21.

Peloton's financial performance for the rest of 2020 will hinge on its ability to ramp production in order to satisfy demand. The good news is that the company is "comfortable that we're in a position to meet the holiday demand on Bike and Tread," according to exec William Lynch.

Evan Niu, CFA owns shares of Peloton Interactive. The Motley Fool owns shares of and recommends Peloton Interactive. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Peloton Interactive, Inc. Stock Quote
Peloton Interactive, Inc.
PTON
$13.53 (13.60%) $1.62

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/14/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.