Peloton snags upgrade, is 'not a dead brand' : analyst

Peloton (PTON) shares surged Monday morning on an upgrade from longtime bear Simeon Siegel at BMO Capital. Siegel moved Peloton to a market perform rating, saying in a note that "after all this time, the risk/reward has shifted, even seeing a likely upward skew at current levels." He joined Yahoo Finance Live to further discuss, noting that the company has shifted away from its "instagram-able, beautiful" bikes and instead focusing on content. Recently Peloton guidance forecasted subscribers down in the next quarter, which doesn't deter Siegel. Instead, the "saturation concerns" paired with "seasonality" made it make sense to guide subscribers down. Ultimately, Siegel says it will be "very important" to figure out the company's ultimate market size.

Siegel points to previously prestige brands like Victoria's Secret (VSCO), Michael Kors (CPRI) and Under Armour (UAA) who had to navigate a transition from being a prestige brand to one of ubiquity battling declining demand. But just because a brand is going back down "does not mean they are dead," Siegel explains. Peloton (PTON) will soon have to navigate a similar trend. "I don't think Peloton is a dead brand at all," Siegel says, but it "certainly doesn't stand for what it used to stand for." It's important for Peloton to look at this decline and "bear hug" brand loyalists, rather than push products on customers that don't want them.

In his full interview, Simeon dives deeper into his Peloton upgrade with Brad Smith and Julie Hyman.

Top Video Moments

00:00:15 Peloton pivoting from machine to content

00:00:44 PTON won't be guiding down forever

00:02:13 Brands declining on ubiquity aren't "dead"

00:02:40 Where did Peloton go wrong?

00:03:00 "Bear hug" brand loyalists

Video Transcript

SIMEON SIEGEL: I think what made Peloton so special initially was the fact that it was this Instagrammable beautiful machine that people want to say they had a Peloton Bike, even more so in that they were using the Peloton content. And I think the company is pivoting that conversation to say it's the content that makes us special. The equipment-- which, by the way, has been losing money-- that's-- not gonna say necessarily evil, but that's the way that we get there.

If you can get there without it, that's important as well, which is why, over the next month, they're talking about a big relaunch of the digital program. I don't know what that's gonna look like. I think, to be very clear, this upgrade is not suggesting all of a sudden we think the addressable market size is huge.

I think the point here is you knew that this number-- the company guided subscribers down for the first time this quarter. They had to do that because seasonally, it's beautiful outside. So you take all the saturation concerns. You overlay that with seasonality. And it made sense for them to guide down.

What I don't think is this is just the be-all, end-all. I don't think that forever we're gonna be guiding down. But I do think it is important to acknowledge they have stretched this market. They have pulled forward the market, rather.

So figuring out what that ultimate addressable market size is is going to be very important. What I think, though-- and, Julie, you and I have talked about this forever a la Victoria's Secret and Under Armour-- sometimes you can sell less and charge more and make more money. What's fascinating is they guided subscribers down. The amount that the subscribers are paying is going up.

JULIE HYMAN: Well, and sort of on a similar front, Simeon, the arc of this brand from, like, this coveted status symbol thing having this bike has just changed enormously. And as you look at the parallels between it and other retailers who have been able to manage that transition-- like a Michael Kors pops into my head, for example-- like, what can we learn from those other situations? They're not exact parallels, right? But they have some parallels, so, you know, about what Peloton can do to manage that transition correctly from, like, a prestige product to a mass product, right?

SIMEON SIEGEL: No, I think you're putting it perfectly. I think the key word used there was a brand. I think we think about tech companies. They're not as much brands, whereas you think about whether it's Michael Kors or Under Armour. You think about brands that were once on a growth arc that then find themselves too ubiquitous, and now they're going back down.

It does not mean they are dead. I mean, this was the conversation. Remember, we were kind of aghast when I upgraded L Brands back in the beginning of the pandemic, saying Victoria's Secret wasn't a dead brand. It had $5 billion of revenue.

I don't think Peloton is a dead brand at all, but it certainly doesn't stand for what it used to stand for. It's certainly not garnering that Instagram appeal. And so what I think those brands have to internalize is where did they go wrong. What changed?

And a lot of times, it's tied to ubiquity. With fitness, it's also tied to just-- I'm not gonna say humanity's laziness, because that's not nice. But it's just hard, right, to continue to inspire yourself to do it.

What I think they should do-- and we've been saying this for a long time and [INAUDIBLE] been saying this for a long time. I think they need to bear-hug their brand loyalists. What Michael Kors did was they said, we're OK giving up volume if it gives us price and brand equity because inevitably, the best thing I could get is more dollars per handbag, in Michael Kors' case, Under Armour getting more dollars per sneaker, right? Victoria's Secret-- more dollars per intimate.

If you overextend, and that forces you to promote in a bad way-- I'm not against promotions broadly. But if it forces you to force your product to someone, sometimes you can do better by selling less and charging more and making more money. And that Victoria's Secret-- I mean, listen, we saw L Brands. It was the top 10 stocks within the S&P for two years running, even though revenues came down.

So revenues coming down doesn't have to be a scary thing if it's under your control. And I think that's this conversation the company is focusing on free cash. I think that's where this opportunity now lies for them to say they are certainly not being valued as a growth company.