Why Peloton Interactive Stock Soared 48% in November

What happened

Shares of Peloton Interactive (NASDAQ: PTON) surged 47.6% in value last month, according to data provided by S&P Global Market Intelligence.

The company that wants you to sweat under your own roof announced better-than-expected earnings last month, which sent the shares soaring. Earnings were worse than expected, but revenue topped estimates. Management is investing for growth, so investors were willing to give the company a pass on profitability, sending the stock price surging following the earnings news.

The Peloton bike. Image source: Peloton Interactive.

So what

Peloton beat revenue estimates and delivered a positive outlook for the holidays. Here are the highlights:

  • Connected fitness subscribers jumped 103% year over year, expanding the member base to 1.6 million.
  • Likewise, total revenue increased by 103%, to $228 million.
  • Subscribers to the company’s fitness program seem to like the progress they see in the mirror, as churn was an extremely low 0.90%, with a 94% 12-month retention rate.
  • Gross margin ticked up, which helped narrow the net loss to $49.8 million — a $4.8 million improvement.

There has been plenty of investor skepticism about the consumer appetite for $2,000-plus stationary bikes on top of a $39 monthly subscription to online fitness classes, which are displayed on a flat-screen monitor attached to the bike. The latest earnings results basically told investors that, yes, people are willing to pay up to get in shape.

Not only is revenue still climbing, but engagement seems to be getting better over time. The average number of monthly workouts per subscriber has been gradually moving higher over the last few years, reaching 11.7 in the last quarter — up from 7.4 in the fiscal second quarter of 2018.

Now what

Peloton appears to just be getting started on its growth path. The company just had its initial public offering in September, but it took the first quarterly earnings report before investors could feel confident in the growth story. Peloton is investing for international growth and making investments to “scale operations” (in other words, to reach profitability) and enhance the member experience.

As for the next quarter, management is calling for growth of 88% year over year in subscribers, as the company penetrates new international markets. Revenue should be up 58% year over year at the midpoint of the guidance range.

Investors are giving the company a pass on profitability for now. The key to profitable growth will be keeping that subscriber churn rate down as the business grows, and the key to that will be introducing more features and a variety of workouts to keep members craving another good sweat. Following its IPO, Peloton has $1.4 billion to invest to make it happen.

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John Ballard has no position in any of the stocks mentioned. The Motley Fool recommends Peloton Interactive. The Motley Fool has a disclosure policy.

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