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Peloton Q3 Earnings Preview: 1 Key Metric You'll Want to Know

By Parkev Tatevosian - May 4, 2021 at 8:33AM

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The exercise equipment maker will report third-quarter results on Thursday, May 6.

A leader in the exercise equipment market, Peloton Interactive (PTON -2.50%) has seen its sales grow by at least 100% a year for six consecutive years. That rate was only helped this past year by the pandemic-led temporary closures of gyms around the country. But Peloton may be facing challenges that could slow its torrid growth.

This past year, consumers made significant changes in how they spent money, buying more goods and services that can be used from home as they socially distanced to protect against the pandemic. As a result, demand for Peloton products and subscriptions to its live and recorded workout classes from professional trainers surged. As vaccinations have ramped up and more people again venture out socially, questions about continued demand for Peloton products and services arise.

That's why, when Peloton reports third-quarter results on Thursday, May 6, the one key metric you'll want to know is how many connected fitness subscriptions Peloton has. This will be a telling measure of the company's earning potential over the long run.

A man exercises on a Peloton stationary bike in a room with a large window as a woman walks by

Peloton reported 1.67 million connected fitness subscriptions in the second quarter. Image source: Peloton.

Peloton is the new gym membership 

Peloton defines a connected fitness subscription as a person, household, or commercial property who has a paid subscription to a connected fitness product. Peloton reported having 1.67 million connected fitness subscriptions in Q2, which was a 134% increase from the same quarter last year. The company is guiding investors to expect 1.98 million subscribers when it reports its third-quarter results.

Connected fitness subscriptions are a key indicator of Peloton's market penetration and growth. Expanding this metric will directly increase Peloton's profits. The company invests quite a bit in creating classes and content for its members, generating fixed costs. If those costs can be spread out over more people, it reduces the per-unit cost and increases profitability. Basically, the costs are roughly the same whether 5,000 people are attending a live virtual class or if 500,000 people are attending.  

Moreover, every new member that signs up to Peloton is potentially another person that will not sign up for a physical gym membership. After all, if you've paid the hefty price tag for a Peloton product and service, you're probably planning on using it for most if not all of your exercise needs. One of Peloton's long-term goals is to make gyms obsolete, and each new Peloton member is another step in that direction. 

What this could mean for investors 

Analysts on Wall Street expect Peloton to report revenue of $1.1 billion and a loss per share of $0.12 for Q3. The revenue expectations from Wall Street analysts are nearly identical to what management forecast.

Share prices of Peloton are down over 36% year to date, in part because investors are betting that as states ease restrictions on gyms and more Americans get vaccinated, the demand for Peloton's products will slow down.

I think those worries are overblown. Recall that Peloton's revenue was at least doubling each year even before the onset of the pandemic. Additionally, a reopening of economies worldwide could help reduce some supply and shipping constraints Peloton has been working to resolve. Finally, the reopening of the economy and some capacity expansion going on will allow Peloton to begin tapping into multiple international markets it has yet to open.

Long-term investors looking to add shares of Peloton can feel equally confident in buying before or after it reports third-quarter earnings on Thursday.

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