Needham: Peloton is a key beneficiary of COVID-19

On Friday, Needham analysts reiterated their buy rating — and $50 price target — on shares of Peloton following comments by the company’s CFO, Jill Woodworth. The firm’s argument was that Peloton has been a key beneficiary of COVID-19 and will continue to do so. The Final Round panel discusses.

Video transcript

AKIKO FUJITA: Jen, let's keep the conversation going with one of our favorite stay at home trades, I think. You have a Peloton. I know--

[INTERPOSING VOICES]

AKIKO FUJITA: But we have a new update on a note from Needham, this time, with the interview with Peloton's CFO Jill Woodworth, highlighting a number of positives for this stock moving forward, a higher ecosystem value.

Lower cost spike is a high priority, which I think we've talked about before, that there's still a pretty high cost point going in. But you know, Peloton has been a little more creative during this shutdown period, right? I know I signed up for a 90 day trial, because I don't need a bike. They have yoga. They have other classes as well. How is this all going to play out once people start getting out of the house?

JEN ROGERS: Right, so do you-- I mean, could you see yourself, I guess, sticking with it beyond the free three months?

AKIKO FUJITA: No, the free three months is key.

JEN ROGERS: Yes.

AKIKO FUJITA: You know, you've got 90 days. You figure, well, I want to see what Peloton is about. But I'd rather go to a class and actually go to-- you know, use class pass or have more of an in-person experience.

JEN ROGERS: I mean, I think they're banking on the fact that there will be people that continue that maybe you really have liked the meditation part of it, or you've like just being able to stretch when you got back from one of your classes. Some of the things that I thought were interesting in this note were just how many people had not expected to be buying a Peloton at this time. Pre-COVID, 30% to 50% of new owners had no purchase intent for a Peloton pre-COVID.

It really shows what has happened to the demand picture because of sheltering in place here. Also, looking at about 2% of their bikes are in buildings right now, and people use them. And they like them, but you know, they don't have access to their own. Those people have been buying more. So they're trying to show with this note, and I think making the case that just a little bit of exposure can get you trapped into the ecosystem. And that's what Peloton's banking on.

MELODY HAHM: Yeah, and Akiko, I mean, I'm going to push back a little bit. You signed up for that 90 day trial. Most of the trials that I've encountered have been 14 days, or seven days, or 10 days, which doesn't make it a sticky experience. It's very hard to get obsessed or addicted. I imagine that after three months, you will become kind of a native customer to a certain extent, especially looking at this Cowen note that talks about a survey that they did internally.

And the question that was very interesting-- I know, Jen, you really liked this survey last time. --was, how comfortable will you feel returning to a certain venue? And gyms and concert venues were tied as last in terms of comfort level, in terms of feeling safe and secure knowing that there were hygienic procedures in place. And I would have to say, that kind of mirrors and echoes my own sentiment right now. I would feel much more comfortable going to an airport than a gym, and I anticipate that this will be a continued trend.

AKIKO FUJITA: So Melody, to that point, if that mindset is going to continue, how important is it for Peloton to get that lower cost point, the lower priced bikes, so that they can bring more people into the fold? Sure, they've got people who signed on one month, two months. They realized, I need some kind of workout, but not everybody can afford a Peloton bike.

MELODY HAHM: Exactly, and that's why it's key. I mean, even looking back a year and a half ago, I remember, you know, Erin Fuchs, who was my editor at the time, she was specifically saying that she has a Peloton bike. But she ended up using the interactive or the digital service a lot more to have a running coach outside to find any sort of activity, because she wasn't actually a huge fan of spinning.

So I do think their diversification will pay off during this time. I personally like to use a lot of these individual trainers, who typically have done one on one classes, who are now offering up and democratizing access to a lot of their content, which I feel like is a very special perk during this time. So anecdotally, I will not be subscribing to Peloton anytime soon.

JEN ROGERS: One other point from this note in the bull case assumptions is that they think that basically this installed base of screens-- and Melody, I know you've done work on the MIRROR before, another company that's trying to get connected video and classes into your home. They're actually making the case in here that Peloton is possibly going to be able to leverage this for third party, ancillary fitness, business service apps.

So I don't know how that works, but they could then be taking revenue in from people on the outside as well. Because they're going to have-- they're going to have the platform, right? And maybe right now, they control everything. But maybe going forward, they're going to let out a little of that leash and just be able to cash the checks instead of--

AKIKO FUJITA: Yeah, and I guess the thing I keep wondering is just these classes that don't involve the machines. How many people are still going to stick around? Because like Melody said, there's so many other classes that are steaming right now. Certainly a lot of options out there for those who are motivated enough to work out.