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Peloton Interactive: Riding High on Consumer Spending

Peloton LogoPeloton Interactive (NASDAQ: PTON), a high-end fitness products company, is a relatively recent addition to our Battle Road IPO Review Consumer sector coverage. Founded in 2012 and based in New York City, Peloton is expected to record revenue of $1.48 billion in its fiscal year ending June 30th 2020, along with a loss per share of $1.29. This compares to revenue of $915 million in fiscal year 2019, during which the company recorded an operating loss of $113 million, excluding depreciation expense.

Peloton announced the pricing of its 40 million Class A share IPO on September 25th. The deal was priced at $29 per share, and was led by a remarkably large number of underwriters—21 in total—reflecting in part the recent IPO drought. Peloton also announced the concurrent sale of 3.5 million additional shares of its Class A common stock in a private placement to entities affiliated with TCV, an existing shareholder. Following the IPO, roughly 45 million Class A and 236 million Class B common shares outstanding for a total of 281 million shares outstanding, with Class B shares holding 99 percent of the voting power. At a recent share price of $28, Peloton Interactive possesses a market cap of roughly $7.9 billion.

Peloton Interactive positions itself as an interactive fitness platform at the “nexus of fitness, technology and media,” which creates, in its own words, “engaging to the point of addictive” programming for customers. PTON is primarily a high-end exercise bike and treadmill company, with approximately 69 percent of sales coming from connected products, with most of the remaining 31 percent from subscriptions associated with its product sales. Over the last five years, the company has sold over 580,000 exercise bike and treadmills, with about 97 percent of the total sold in the U.S. Roughly 50 percent of revenue comes from sales from its website onepeloton.com. Other channels include showrooms. The company claims over 1.4 million member subscribers, who completed over 58 million workouts in fiscal 2019.

To peruse Peloton’s product offerings on its company website is to realize just how strong today’s consumer economy has become. Pricing for Peloton’s exercise bike begins at $2,245, with a one year limited warranty, and pricing for its tread machine begins at $4,245, with a one year limited warranty. In the most recent quarter ended September 30th, Peloton reported revenue of $228 million, a 104 percent increase over the prior year, along with a gross margin of 46 percent, flat with the prior year. The company’s operating loss was $51 million, as compared to an operating loss of $56 million in the prior year. Post-IPO Peloton has a strong balance sheet, with roughly $1.5 billion in cash, or $5.25 in cash per share, and no debt, though we do note that the company is currently not profitable.

Tags: IPO Research, independent research on IPOs, independent stock research; independent research on Peloton Interactive, independent research on Consumer stocks; independent research on Consumer IPOs.

Pinterest (NYSE: PINS)
Internet IPOs, IPO Research, JOBS Act, Pinterest IPO Research, Technology IPOs

Pinterest (NYSE: PINS)

Pinterest (NYSE: PINS)Pinterest (NYSE: PINS), an internet advertising company focused on image-based search for consumers, is a recent addition to our Battle Road IPO Review Internet sector coverage. Consensus estimates call for revenue of $1 billion this year, up 32 percent from $756 million in 2018, along with a loss of $0.13. For 2020, Consensus projections call for revenue and EPS of $1.4 billion, and $0.02, respectively. Pinterest priced its 75 million Class A common stock IPO at $19 per share on the NYSE on April 17th. At a recent share price of $27, Pinterest’s market cap is roughly $14.3 billion.

Pinterest revenue grew 58 percent in each of the last two years, reaching $756 million in 2018.

Unlike most tech IPOs of the last 24-36 months, Pinterest narrowed its losses in the year prior to its IPO, recording an operating loss of $75 million, versus an operating loss of $138 million in 2017.  Operating leverage was achieved in nearly all cost categories over the last year, including gross margin, R&D and G&A. Sales and marketing remains 34 percent of revenue. Company claims that its website attracts 43 percent of internet users, along with strength among Consumer Packaged Goods (CPG) companies and retailers.

While Pinterest has been narrowing its operating loss over the last two years, the company is not yet profitable. This contrasts to best-in-class ad driven internet companies Alphabet and Facebook, each of which were solidly profitable in the year before their IPOs. For example, in Q1 2011, a year before its IPO, Facebook recorded a 54 percent operating margin on revenue of $731 million.

Prior to its IPO, Pinterest had an unusually high level of DSOs: 105 days at the end of 2017, and 107 days at the end of 2018. This is about twice the level of Facebook, and suggests that the company conducts a considerable level of business through ad agencies. We noted that when it reported its first quarter as a public company, DSOs declined to 72 days, a rather miraculous feat.

As an Emerging Growth Company under the JOBS Act, Pinterest has less stringent reporting requirements than other public companies. These include (1), Not being required to have its independent registered public accounting firm audit its internal control over financial reporting under section 404 of the Sarbanes-Oxley Act; (2) Reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements; (3) Exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

No single advertiser accounted for more than 10 percent of revenue, but a substantial portion of revenue comes from a “small number of advertisers concentrated in CPG and retail,” according to Pinterest’s S-1 filing. As a nearly 100-percent ad driven platform, Pinterest is subject to a low level of visibility from a forecasting standpoint, as most advertisers have only short-term ad contracts with the company.

Going forward, several key questions relating to Pinterest’s long term growth prospects remain. For example, the company’s current ad revenue strength is among CPG and Retailers. Company intends to expand into other verticals, such as automotive, technology, financial services, media, entertainment, and travel. How successful has it been in these verticals thus far? Will image-based search work as well for Pinterest in these other verticals?

Perhaps most critically, Google is known to constantly modify and improve its search algorithms, seeking to ensure that what shows up in organic search results is not artificially induced by website operators. Many web search optimization companies are focused on trying to figure out how Google works, yet Google has a long tradition of penalizing companies that seek to “game out” its algorithms. In the first quarter of 2018, Pinterest acknowledges that Google “de-indexed” Pinterest landing pages, and that this action hurt traffic and user growth. We are curious as to why Google took this action. Could it occur again?