Peloton & Lyft Q1 2020 – Black and white.

One winner and one loser from the pandemic.

Peloton Q1 2020 – Hardware heroin.

• Peloton reported excellent results as the virtual gym trend is accelerated by the pandemic but its dependence on hardware is worrying as Peloton is not Apple and competition here is going to be brutal.
• Q1 2020 revenues / EBIT were $525m / LOSS$58m far ahead of revenue estimates of $478m but below EBIT estimates of LOSS$48m.
• Critically, user numbers were excellent at 886,000 and workouts per user per month also jumped hugely to 17.7.
• Retention was excellent at 93% and churn very low at 0.46% strongly indicating that Peleton is doing a great job and providing a great service that users love.
• The problem is that hardware is 80% of total revenues which is completely unsustainable as the real future of this company is as a provider of fitness media.
• Peleton hardware is not required to access the service and the wide availability of far cheaper alternatives ensures that the high gross margin the company earns on its fitness hardware is not going to last.
• This is why Peloton is not Apple because what Peloton is doing is effectively the same as Apple allowing iOS to run on Android devices.
• Hence, it is on the basis of its fitness media content that the company should be judged.
• Here the outlook is extremely good as most reviewers and users rave about the instructors and the content and much less about the hardware.
• Hence, when hardware starts to come under pressure, revenues and EBITDA are going to wobble before finding its eventual reality which is likely to be commodity hardware and very high margin media.
• Media revenue is currently at a run rate of $400m per year but could easily reach $600m in the next 12 months or so.
• The question is whether this revenue stream can justify an $11bn valuation because the hardware bonanza the company currently enjoys will not last.

Lyft Q1 2020 – Cataclysm to come.

• Lyft reported good results as the pandemic impact has really only been felt in April meaning that the financial statements have not seen the cataclysm to come.
• Q1 2020 Revenues / EPS were $955m / LOSS$1.31 compared to consensus of $838m / LOSS$1.30 and while riders only grew by 3% YoY, engagement of those users did well growing by 19% to $45.
• This implies that prior to the pandemic Lyft was doing well but as everyone knows, this is now academic.
• In April, rides fell by 75% YoY and have now stabilised at down 70% YoY.
• Lyft has laid off 17% of its workforce, furloughed another 300 and cut salaries for the rest but this is unlikely to be enough.
• This is because unlike the stock market, I do not believe that a V-shaped economic recovery is on the cards.
• A V-shaped economic recovery required for a highly effective vaccine to be available in billons of doses now and of this there is no sign.
• In fact, I suspect that it will be the end of 2021 before this is a reality.
• The fact that Lyft is spending a fortune on hand sanitiser and masks for its drivers is all the evidence one needs to realise that things are not going back to normal when the lockdown is lifted.
• This means that riders are to continue to have a strong aversion to getting in a vehicle with a stranger for fear of infection which will not be allayed until there is a vaccine.
• The good news is that Lyft is planning for a huge fall in revenues and if there is no recovery, it reckons that it can keep its adjusted EBITDA loss to under $360m.
• This means that GAAP losses will be closer to $600m but critically much of this is non-cash which in this environment is the crucial factor.
• Cash flow during Q1 2020 was an outflow of $206m and assuming this falls to $600m in Q2 2020 (pretty bleak), then Lyft can still survive for 5 quarters before it runs out of money.
• This combined with the fact that Google would in all likelihood bail Lyft out if it got into trouble, leads me to believe that Lyft will survive the crisis.
• Lyft’s is currently valued at around $9bn which is still pretty high for a company whose revenues are about to fall by 70% YoY and where the recovery remains very uncertain.
• I would continue to completely avoid this sector as the risks remain enormous.