Interactive Platoon (NASDAQ: PTON) manufactures exercise bikes and treadmills while netflix (NASDAQ:NFLX) is a streaming video subscription service that produces much of its own content. At first glance, these two companies couldn’t be more different. However, Peloton also offers a video subscription service, and it breaks down those numbers for investors. Therefore, an apples to apples comparison is possible.
It might sound silly exercise (ahem) but bear with me – there are good reasons to compare Peloton action to Netflix action. First, Peloton stock is down more than 80% from its peak, and investors are wondering if it’s cheap. Comparing it to Netflix, I think you’ll agree it’s good value for money. However, Peloton action isn’t necessarily a buy just because it’s cheap – it’s cheap for a reason and this comparison to Netflix will drive home the point.
What is a subscription streaming service worth?
Despite the proliferation of streaming TV content, there are few pure-play streaming actions. Netflix is the space giant. CuriosityStream (NASDAQ: CURI) specializing in educational content. And fuboTV (NYSE: FUBO) is a sport-centric service. However, fuboTV generates some of its revenue from advertising, not just subscription fees, so keep that in mind. But the following chart shows how these three streaming stocks compare in terms of key metrics.
|Society||*TTM revenue||Revenue growth rate||Gross margin||**P/S ratio|
As the chart shows, fuboTV has a cheaper P/S valuation than Netflix and CuriosityStream despite its higher growth rate. This is likely due to its gross profit margin. FuboTV’s subscription expenses as well as broadcasting and transmission expenses cost more than what they generate in subscription fees. The company hopes to expand its advertising and sports betting business in time to compensate for this low profitability. But for now, fuboTV is a money-losing company and therefore has a low valuation.
Moving on to the other two companies, it’s tempting to call CuriosityStream stock cheap or Netflix stock expensive. Netflix has lower margins and a lower growth rate, but has a higher valuation compared to CuriosityStream. However, whichever way you look at it, it’s fair to say that investors reward higher margins with richer valuations.
Which brings us to Peloton. Here are the numbers for its subscription activity only – all hardware numbers are excluded.
|Society||TTM turnover||Revenue growth rate||Gross margin||P/S ratio|
|Peloton’s Subscription Activity||$1.02 billion||125%||64%||7.8|
Again, this graph imagines that Peloton was correct a subscription video service. But the stock currently trades at just under eight times the revenue of that segment of the business.
Given its superior growth rate and margins, Peloton’s subscription business seems reasonably valued relative to Netflix.
Why are Peloton shares so cheap?
Of course, Peloton is not just a subscription business. In the first quarter of fiscal 2022 (the most recent quarter), 62% of total revenue came from hardware products: its exercise bikes and treadmills. And hardware profits are eroding fast. Hardware gross margin in the first quarter was just 12%, compared to 39% in the same quarter last year.
Additionally, Peloton’s management is spending like crazy, anticipating an increase in demand for materials. Consider that it spent $87 million in the first quarter on property, plant and equipment alone to bolster its manufacturing capabilities. During the quarter, it also spent $332 million on inventory. And sales and marketing spend soared 148% year-over-year to $284 million.
However, the anticipated demand for material has not been there. Hardware revenue fell 17% year over year in the first quarter. On the conference call to discuss the results, Chief Financial Officer Jill Woodworth said: ‘Clearly we underestimated the impact of reopening on our business’ and also, ‘Overall traffic was unresponsive. to our initial expectations. Interpretation: We spared no expense in preparing for consumer demand that did not materialize. Ouch.
A recurring revenue subscription business is easier to manage than a lumpy hardware business. If Peloton were just first, the action would look like a bargain today.
But Peloton is also a lumpy hardware company. This is in stark contrast to pure subscription businesses. Revenue visibility is much clearer for companies like Netflix and CuriosityStream. Expenses are therefore easier to manage. If you buy Peloton stock today, you assume that management can effectively forecast demand for materials and spend accordingly.
Although it may be tempting to simply hope Platoon management can change things, you may want to wait to hear from management when they release second quarter financial results on February 8 before making any decisions. Even though the stock may look cheap, I wouldn’t buy it until management does more to regain investor confidence.
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Jon Quast owns Peloton Interactive. The Motley Fool owns and recommends Netflix, Peloton Interactive and fuboTV, Inc. The Motley Fool recommends CuriosityStream Inc. The Motley Fool has a Disclosure Policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.