Greg Martin, Co-Founder at Rainmaker Securities, joined Closing Bell to break down what the future might hold for Peloton after another disappointing earnings report, including the possibility of a takeover.

Closing Bell

Future Unclear for Peloton Following Dismal Fiscal Q3 Earnings Report

Welcome back to closing bell on cheddar news. Everyone. Peloton has been one of a number of companies that has suffered as life starts to return to normal in the US Wall Street, seeing just how bad things are for the exercise equipment company when it posted a major earnings missed this morning, A sales tumbling 15% from the same time a year ago and the company burning through cash, losing some $757 million dollars in the quarter, sending shares tumbling even more. Well, joining me now is Greg martin, co founder of Rainmaker Securities. Greg always good to see you. Thanks for coming on at the start kidding. Happy to have you the stock Canyon, a new 52 week low today, $11.25 apiece. What's your takeaway from the state of business for Peloton? You know, it's interesting because I keep wondering, you know, with each passing month, when it will hit its low point. Um, because you know, I do like their core subscription business, you know, they, one of the bright spots in their announcement today was that they were hitting 370 million of quarterly subscription revenue, which is up significantly From last year and that their turn rate is actually lower. It's .75% versus .79%. The problem is they're getting killed with their hardware, They way overbuilt business based on expectations from the pandemic, that growth would continue and they have massive inventory over ridges And they built up their business and their cost structure to a point that wasn't sustainable. And so now they are having to swallow those costs. And of course that's reflected in the large losses that they have. And so it's really obscuring the quality of the subscription business, which if you think about it at 370 million a quarter is about a billion and a half of very high margin subscription revenue. And there's still the sort of # one digital fitness platform in the world. There's a lot to like about the company, but they just need to sort of turn the business around from a cash flow perspective. And you know, when the market looks at the company with 879 million of cash losing 757 million and a quarter, they start to have liquidity concerns. Here's a question. What happens next? How, how concerning are those liquidity problems? And do you think that the new ceo with a financial background can get the free cash flow in a better position? Well, he's saying the right things. Um he started off sort of inheriting a massive restructuring. They laid off 2800 people. They talked about cutting costs by 800 million, you know, by the end of 2020 for um he's in his statement, he said his number one priority is getting the company to cash flow profitable by The end of 2023. So I think that is the right mode. And then turning to growth. Um and he's also talking about how how do you, how do you grow um in the future, but right now the most important thing for them is to is to get the company um liquid. And I think one of the things they announced was a $750 million 15-20% to sort of get the cash flow and the and the cash on the balance sheet to a point where they could kind of weather this storm where they're having to sort of go through inventory and restructure the business. But I do believe that there is a light at the end of the tunnel if they can get through these liquidity concerns and focus on the very good, high margin, high growth potential subscription business. So let's talk about that light at the end of the tunnel, what's the timeline Greg in the best case scenario that this company can turn itself around so that it does perhaps look attractive to a potential acquire out there. Yeah, well, one of the interesting things is a potential acquirer can probably see the nugget, which is a subscription business, can see three million connected subscribers who don't turn a ton of data heavily engaged and it may be that um someone comes in right now and tries to buy the company at a, at a very low price, recognize that there's a lot of future value in the, in the brand and the subscriber base that they have. And so I think that it's important for the company to kind of quickly, uh, deal with their liquidity issue. You know, obviously they're talking about, you know, the 750 million that I mentioned maybe getting a private equity infusion if they want to go it alone as an independent company. But I wouldn't be surprised if we see some and we've talked about it for a couple of months now if we see some M and A from both strategic and maybe even a private equity player who recognizes that there's a really great subscription business that, that could be, you know, managed differently as a private company. So it'll be fascinating. I think the next few weeks as the company is at such a low point to see if an M. And A opportunity materializes, which I don't think is the right time for the company to sell, but they may, they may run into a situation like, like twitter where where they're kind of forced to sell one more quick question, what's the value of the instructors? We just saw a recent advertisement peloton clearly pivoting into the value and promoting it's most used instructors on the platform. We talk about the services business, it is high margin, but how important are those instructors to that business the instructors are extremely important if you think about what keeps people engaged, what what the value of that subscription is. It's the instructors and the class and the instructors have personalities that people um come to every day and, you know, most people that use the peloton um you know, have an affinity for a particular one or two or three instructors. So those instructors are valuable and I think, but they're really starting to brand themselves around those instructors because that's what makes peloton unique. It's not the hardware, it's the instructors, it's the class, it's the digital experience and the connected experience to these instructors. And so I think that's going to be important part of their branding in the future. All right, Greg martin, co founder at Rainmaker Securities Greg, thanks so much for joining.