Economic Preview: Peloton earnings: Are free trials swaying ‘reluctant buyers’?

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Peloton Interactive Inc. hasn’t received a very warm welcome thus far from Wall Street, so the maker of fancy exercise equipment and fitness videos will be looking to change that narrative when it delivers its first earnings report on Tuesday morning.

There are a number of moving parts for Peloton PTON, -1.52% It is launching its service in Germany during the current quarter, attempting to grow sales of its newer treadmill offering and continuing to invest in studios in the U.S. and the U.K. But the biggest number to watch when Peloton delivers its results is the company’s December-quarter outlook, which will show how the company expects its equipment and services offerings to fare during the crucial holiday season.

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The December quarter tends to be a seasonally strong one for Peloton, according to Cowen & Co.’s John Blackledge, due to holiday gifting and new year’s resolutions. Blackledge said a new home-trial offer provides opportunity for upside this time around.

Here’s what to expect from Peloton’s Tuesday report.

What to expect

Earnings: Analysts surveyed by FactSet expect that Peloton lost an adjusted 34 cents a share in the September quarter. That’s the same as the consensus estimate on Estimize, which crowdsources projections from hedge funds, academics and others.

Revenue: The FactSet consensus calls for $199 million in September-quarter revenue, up from $112 million a year earlier. The Estimize consensus models $212 million.

Stock movement: Peloton shares have risen 9.3% over the past month, but the stock is off 13% from its September IPO price of $29. Analysts surveyed by FactSet have a rosy view of the stock, with 19 out of 21 analysts listed rating the stock a buy, while the other two remain on the sidelines. The average price target is $30.85, 22% above recent levels.

Read: Peloton’s rough ride continues despite comparisons to Apple and Roku

What else to watch for

Canaccord Genuity analyst Michael Graham is looking for Peloton to show about 35,000 new connected fitness subscribers for its September quarter, bringing the company’s total up to almost 550,000. He expects that the big areas of investor attention going into the conference call are the size of Peloton’s market opportunity and the company’s profit trajectory.

“In terms of profitability, Peloton generates enough gross profit from [connected fitness product] sales to largely cover sales and marketing expense, enabling rapid subscriber growth and greater investment in key areas like content and logistics,” Graham wrote. “FY20 will be a heavy investment year along these lines, with two new flagship studios, additional fulfillment capacity, and a new headquarters contributing to Ebitda [earnings before interest, taxes, depreciation and amortization] margin trough of (19%).”

He rates the stock at buy with a $33 target price.

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Cowen’s Blackledge will be watching for commentary on the company’s international progress, following recent launches in Canada and the U.K., as well as opportunities for enterprise sales. Though he acknowledges that ongoing music litigation shouldn’t have a significant impact on the company’s numbers, he notes that Peloton’s management might provide an update on the issue.

Blackledge rates the shares at outperform with a $34 target price.

One question for MKM Partners analyst Rohit Kulkarni is whether Peloton is exposed to risk by featuring star instructors on its platform, asking whether the company saw any drop in engagement or increase in churn rate after instructor Jennifer Jacobs left over the summer. He also wonders whether Peloton benefited from increased brand awareness following its IPO.

Kulkarni rates the stock at neutral with a $24 target price.

SunTrust Robinson Humphrey’s Youssef Squali is upbeat about the free-trial offer that Peloton launched toward the end of the last quarter. “We believe the introduction of the 30-day trial is significant as it should help push some of the more reluctant buyers to purchase the product given the money-back guarantee (including shipping fee),” he wrote. “This may be particularly potent around the upcoming holidays and the new year’s resolutions.”

He has a buy rating and $30 target on Peloton’s stock.