Apple & Peloton – Opposites

Fat middle age versus fighting for survival.

Apple FQ2 24: Bounces off the bottom.

• Apple reported reasonable results and predicted a better FQ3 as the stabilisation in the smartphone market and continued growth in the services business are arresting the revenue decline.
• Apple also sprinkled its commentary with as much AI as possible promising that it would share “some very exciting things with our customers soon” raising expectations that it intends to slay the generative AI bugbear at WWDC in June.
• FQ2 revenues / EPS were $90.8bn / $1.53 just ahead of forecasts of $90.4bn / $1.51 and the company guided better for FQ3.
• Here, the company overall is expected to grow by low single digits (1%-3%) and within that services will grow at double digits.
• Signs of stabilisation and the promise of answering generative AI critics within a month came as a relief and the shares rallied 6% in after-hours trading.
• Most telling of all is the massive $110bn stock buyback program which is a sure sign that Apple is now a middle-aged company and that growth from here is going to be very hard to come by.
• It will still continue to have the most valuable digital ecosystem, make the best smartphones, and print cash like there is no tomorrow, but real growth does not look like it is coming back.
• There is nothing wrong with this, but Apple will struggle to justify the 25x FY2025 PER multiple that it trades on and buying back $110bn of stock will help reduce the multiple without the share price having to fall.
• Hence, I think that the share price could easily underperform EPS expansion making this a lacklustre, albeit pretty safe place to invest which is not for me.

Peloton Q3 24: All hands on deck

• It is always dangerous to send a CFO to do the CEO’s job, but I thought that this was an exception and I got it badly wrong.
• Peloton reported relatively reasonable results, but CEO Barry McCarthy’s tenure has come to an end as the board is giving up on his ability to turn the ship around and is looking for another captain.
• Peloton has also announced a further $200m cost reduction program that will reduce headcount by another 15% which is an admission that the strategies for growth put in by Mr. McCarthy have not delivered as expected.
• In his defence, I think that some of the partnerships he put in place set the subscription business up well, but they have yet to deliver the value expected.
• The company is also engaged in restructuring its debt position in another admission that things are not going well at all.
• Q3 24 revenues / EPS were $718m / LOSS$0.45 broadly in line with forecasts of $718m / LOSS$0.36 but no one was paying attention to these.
• The only thing that matters is cash flow from operations and here the FQ3 24 numbers are still red at $99m but this is much improved from the $332m that left the business in the same quarter last year.
• The problem is simple, the business is carrying far too much general and administrative expenses for a company of this size, and it needs to be cut which is what has been announced.
• At its heart, the core subscription business is fine with 3m subscribers remaining pretty loyal, paying every month and delivering 68% gross margins.
• I think the problem boils down to Mr McCarthy wanting to fix the business and return it to growth all at the same time.
• What I would have preferred to see would have been a clean-up where the finances stabilize and generate cash so that the debt can be dealt with and then using those proceeds to invest for growth.
• Mr McCarthy didn’t really have that kind of time which is why I suspect he made the choices that he did.
• If one extracts the subscription business this is easily worth $4bn – $6bn on its own and the problem has always been cleaning up the mess that surrounds it.
• The problem is that the mess is much greater than expected and Mr McCarthy’s inability to execute the clean-up leaves the shares at all-time lows.
• What the company needs now is a hard-nosed fixer who will make the changes required to stabilize the business and at that time, I suspect a sale to private equity or a larger fitness player is probably quite likely.
• I bought a small position in Peloton at $6 and am now faced with the prospect of doubling up, getting out or doing nothing.
• There is still plenty of upside in the company but whether this will accrue to the shareholders or the debt holders is not clear.
• One for careful consideration.