Peloton Shares Fall On Slowing Revenue, Growing Cash Burn

Exercise equipment maker Peloton Interactive Inc PTON reported a better-than-expected second-quarter loss Wednesday, but fell 10% after showing a "classic example" of two concerning metrics in its quarterly report, Sarat Sethi, managing partner at Douglas C. Lane, said Thursday on CNBC's "Squawk Box."

Peloton's Falling Revenue Growth

Peloton's stock moved lower after the company's report showed slowing revenue growth and rising cash burn, Sethi said.

Specifically, revenue grew by more than 100% in the prior quarter, but Wednesday's reported quarter showed revenue growth of 77%. Net losses worsened from $55.1 million in the same quarter last year to $55.4 million.

After Wednesday's earnings report, momentum investors appear to be looking for an exit, and it is "too early" for value investors to jump in, he said.

Peloton is in the same category as other money-losing new companies, and management needs to provide some sort of outlook as to when it expects to be cash flow positive, Sethi said.

Baird's Peloton Bull Thesis Intact 

Peloton's second-quarter report reinforces the case for being bullish on the stock, Baird analyst Jonathan Komp said in a note.

The company was able to match already high expectations, the analyst said:

• 3.6% upside in connected fitness subscriptions growth to 712,000.
• NMCF Churn of just 0.74% versus expectations of 1.03%.
• Gross margin of 42.3% versus management's guidance of 39% to 40%.

The company remains well-positioned to expand content and command a higher share of users, the analyst said.

Peloton should reach 1 million subscribers in fiscal 2020 and adjusted EBITDA profit ex-SBC could come in one or two years ahead of management's own fiscal 2023 target, he said. 

Bairdn maintained an Outperform rating on Peloton's stock with a price target lifted from $35 to $36.

What's Next For Peloton

When Peloton says it expects to be cash flow positive, be it in 2021 or beyond, the stock should start showing upward momentum, Douglas C. Lane's Sethi said on CNBC.

Peloton shares were down 9.6% at $29.56 at the time of publication Thursday. 

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Photo courtesy of Peloton.