Peloton Interactive's (PTON 10.16%) fiscal 2022 second-quarter earnings report is a reminder that valuation matters. Despite posting a decline in revenue from connected fitness products, the stock rebounded sharply to the high $30s after falling to a 52-week low of $22.81 in January. It now sits around $33 a share.
While the market was focused on management's new cost-cutting plan to improve profitability, it was encouraging to see the subscriber retention rate remain above 90%. Here's why this important number is great news for Peloton.
Image source: Peloton Interactive.
Peloton users love the experience
Weak sales growth of hardware is not news for the company's investors. It was clear after the September-ending quarter that Peloton's revenue growth was slowing as it lapped year-ago acceleration in growth during calendar 2020. While revenue from connected fitness products fell 8% year over year during the holiday quarter, weak revenue growth from hardware is not important with the stock selling at a much lower valuation. Right now, the frequency with which customers are using their Peloton Bike is the number that investors should watch.
On that note, total quarterly workouts were up 25% over the year-ago quarter and grew 2% sequentially over the September-ending quarter.
Most importantly, the 12-month subscriber retention rate stood firm at 92%. This compares to 93% in the December-ending quarter through calendar 2019, before the pandemic.
The high retention rate shows that current Peloton users love the workout experience, and it goes beyond the convenience of working out at home. The company is doing a good job of bringing content to users that makes the workout more enjoyable. For example, it has over 2.6 million songs under license, and it disclosed in its annual report that listening to music is one of customers' favorite aspects of using a Peloton Bike.
During the recent quarter, Peloton announced a new installment in its Beyonce artist series. Peloton also offers workout classes featuring music from several iconic artists, including Taylor Swift, Queen, Foo Fighters, ABBA, and the Beatles.
Over 5 million workout classes themed around Peloton's artist series were taken during the quarter. This represents a year-over-year increase of 50% and gives investors an idea of why subscriber retention remains so high.
Peloton's most valuable resource
Because part of Peloton's marketing strategy relies on word-of-mouth referrals, satisfied customers are a valuable weapon for generating long-term revenue growth.
Providing an engaging workout should lead to more member referrals and growth in Peloton's subscription business, which will be the company's primary source of profit as the business reaches more customers. Connected fitness subscriptions grew 66% year over year last quarter to reach 2.77 million. This is a fraction of Peloton's estimated addressable market of 20 million.
The next year will be a transition period as a new CEO comes in, and management executes its cost-savings plan to realign hardware production with lower demand. The plan is expected to take two years to drive meaningful improvement in profitability. In the near term, the company's guidance calls for revenue to fall from $4 billion in fiscal 2021 to a range of $3.7 billion to $3.8 billion in fiscal 2022.
But the high rate of member retention shows Peloton's long-term growth story is not over. It's clear customers like using their connected fitness products, and there are still opportunities to expand its product lineup that cater to different workout needs, such as strength training, where it introduced the new Peloton Guide in November.
It's going to be a bumpy road over the next year, but this leading fitness stock has likely hit bottom.
