Peloton Earnings Sprint by Expectations, but Stock Drops on Continued Supply Issues

Peloton Interactive (PTON 4.95%), the leading maker of connected home-exercise equipment, reported strong fiscal first-quarter 2021 results (for the period ended Sept. 30) after the market close on Thursday, Nov. 5.

But shares dropped 7.1% in Thursday's after-hours trading session. The market's initial reaction wasn't related to the current quarter's results, which sped by Wall Street's expectations for both revenue and earnings. Investors punished the stock because supply constraints are expected to hurt Peloton's fiscal second-quarter profitability. The company has been unable this year to keep up with demand, which has been soaring in large part due to the COVID-19 pandemic. 

In 2020, shares of Peloton -- which held its initial public offering (IPO) in September 2019 -- have gained 346% through Thursday's regular trading session. The S&P 500 has returned 10.4% over this period.

Image source: Peloton Interactive.

Peloton's key numbers

Data source: Peloton Interactive.

Revenue growth was driven by a 274% rise in connected-fitness product revenue to $601.4 million, and a 133% increase in subscription revenue to $156.5 million. The number of connected-fitness subscribers grew 137% year over year to 1.33 million, and average net monthly churn remained low at 0.65%.

Management had guided for revenue of $720 million to $730 million, so the company handily beat this expectation. (Peloton doesn't provide earnings guidance.) And Wall Street had been expecting EPS of $0.11 on revenue of $748 million, so the company also easily surpassed analysts' estimates.

Peloton generated operating cash flow of $312.1 million in the quarter -- which is incredibly robust -- and ended the period with $2 billion in cash, cash equivalents, and marketable securities.

For context, last quarter, revenue soared 172% year over year to $607.1 million, while EPS landed at $0.27, versus a loss per share of $2.07 in the year-ago period. Both results crushed the Street's estimates.

Supply constraints forecast to last for "foreseeable future"

In my earnings preview, I directed investors to focus on the company's supply-demand dynamics. Here's what management had to say about this topic in the shareholder letter:

Though we have made progress in narrowing our order-to-delivery windows, continued high global demand for our products resulted in a substantial backlog of deliveries at the end of the quarter. In addition to the strong sales we've seen since the early spring due to COVID-19, our outlook also reflects the better-than-expected reception for Bike+ [the higher-end model that launched in the quarter] from both our existing and new members. While we have significantly expanded our manufacturing capabilities ... we will be operating under supply constraints for the foreseeable future (emphasis mine).

The words "foreseeable future" above were probably in large part responsible for the stock's drop in after-hours trading on Thursday. The market hates uncertainty.

Guidance for the holiday quarter

For fiscal Q2 2021, management guided for revenue of $1 billion, representing growth of 114% year over year. This outlook exceeds the $939 million for which Wall Street had been modeling, but probably not by as much as investors have come to expect. 

Peloton doesn't provide earnings guidance. However, it did provide a fiscal Q2 outlook for two profitability metrics: gross margin of about 39% and an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin of 7%. Investors were probably not happy with this guidance, as both numbers are lower than fiscal Q1 results, which were 43.4% and 15.7%, respectively. The company's supply issues are behind this expected drop in profitability. 

Here's management's explanation from the shareholder letter: "The strong reception of Bike+, combined with challenges associated with [Port of Los Angeles] congestion and COVID-19-related warehouse closures, impacted Bike+ delivery dates for many of our customers and caused significant member experience challenges. Therefore, we are incurring additional shipping-related expenses in Q2 to alleviate some of the delays ahead of the holiday period" (emphasis mine).

A fantastic quarter, but... 

In short, Peloton turned in a fantastic fiscal Q1 report and its growth potential continues to be huge. But I think the market got it right by knocking its very highly valued stock down a bit due to concerns about the continued supply constraints. It's likely that some investors are wondering if this issue could reflect a broader one involving top management's ability to forecast, strategize, and execute.

Only time will tell.