Peloton Interactive Inc (NASDAQ:PTON) shares were given a boost after Bank of America upgraded its rating and said the recent earnings strength and appointment of new CEO Peter Stern indicated the company "is no passing fad".
The bank upgraded to a 'buy' stance and raised its share price objective to $9 from $3.75 on the perceived potential for "substantial earnings upside" on continued cost efficiencies, which have resulted in higher estimates.
Fiscalk first-quarter earnings (EBITDA) were much higher than expected and the full-year outlook was raised to $240-290 million, compared to Wall Street's $232 million at the time.
"We believe Peloton can exceed $300 million in EBITDA this year (current estimate is $295 million) and see $400 million-plus as possible over the next few years," BoE analysts wrote.
Relative to other wellness and fitness subscription peers, Peloton has operating expenditure "well above" average and under new CEO Stern, the analysts see a "large opportunity" for more opex cuts, higher hardware margins and subscription price increases, none of which are included in their current estimates, with price increases potentially yielding double-digit EBITDA growth).
Risks are weakness in subscriber trends, execution risk and soft outlook for high ticket durables, it was noted.
On subscriber risks, Peloton's monthly customer churn at 1.6% was "very impressive", but new subscribers are "not growing at a fast enough rate to expand the total subscriber base".
However, full-year guidance "could be conversative as it implies a deceleration through the year".
To date, growth initiatives have yet to take hold, but strategies around more personalized offers could at a minimum stabilize user tends, with Stern also expected to outline details on his plans for growth, though he does not officially start until January.
While Stern does not have experience of being a public company CEO, the co-founder of Apple Fitness Plus has "all the criteria" set by Peloton's board, also including experience of consumer software and hardware, subscription services and is an avid Peloton user himself.
With significantly higher free cash flow generation and debt maturities extended to 2029, Peloton is "in a far stronger capital position than only six months ago" and the BoE team believes that it is "well positioned" to pay down debt which would reduce cash interest and support the valuation.