What Wall Street expects Tuesday

Analysts and investors are eager to get to know Peloton Chief Executive Officer Barry McCarthy and have him articulate his vision for the company’s future. He will have the opportunity to introduce himself to Wall Street on Tuesday.

The former Netflix and Spotify executive has been leading the connected fitness equipment maker for roughly three months since he assumed the role from the company’s co-founder, John Foley. He took over as a slowdown in equipment sales and rampant spending were weighing on Peloton’s profits.

Some of McCarthy’s efforts to bolster the company’s financials and regain investors’ confidence are already underway, as Peloton seeks new customers but also ways to make more money off of its current user base. The company recently slashed the prices of its equipment, including the Bike, Bike+ and Tread, in hopes of making the products more affordable for a bigger audience. On June 1, it plans to hike the fee for a monthly all-access subscription plan, to $44 from $39.

Under McCarthy, Peloton has also been testing a rental option in select U.S. markets, where users can pay a monthly fee of anywhere between $60 and $100 for a rented Bike or Bike+, along with access to its workout content library. It’s still unclear if this option could roll out nationwide.

“With a new CEO, no clear strategy yet, and the fundamental value proposition coming under question, there is a lot of uncertainty on what happens next with Peloton,” Bernstein analyst Aneesha Sherman wrote in a note to clients.

Peloton is expected to report Tuesday a fiscal third-quarter loss of 83 cents per share on revenue of $972.9 million, according to an analyst survey compiled by Refinitiv. That’s compared with a loss of 3 cents a share on revenue of $1.26 billion a year ago.

Here is what Wall Street will be watching for as Peloton reports its results.

McCarthy knows he must cut costs in order to keep the business afloat. The jury is still out on whether Peloton’s plans will go far enough.

Roughly three months ago, the New York-based company announced a massive overhaul of its cost structure that included axing about 2,800 jobs. Peloton also said it would wind down the development of Peloton Output Park, the $400 million factory that it was constructing in Ohio.

All in, Peloton’s plans would slash about $800 million in annual costs and reduce capital expenditures by roughly $150 million this year.

Activist Blackwells Capital has contended that those cuts won’t be enough. The firm, which in late January called on Peloton to fire Foley, continues to push for the connected fitness equipment maker to sell itself to a business such as Amazon, Google or Netflix.

MKM Partners managing director Rohit Kulkarni said he expects Peloton will have to revisit its cost structure this week. The company will likely need to make additional and “somewhat painful but fiscally prudent cost-savings measures,” he said.

“How low can variable marketing spend go, and yet not have a material long-term brand impact?,” Kulkarni wrote in a note to clients. “Is Peloton planning to close stores or delay capital investments such as production studios and factories?”

Kulkarni also said he will be looking for Peloton to detail any initial reactions from consumers to the recent price drops and to the looming subscription fee hike.

Peloton has said previously that it doesn’t expect to be profitable, on an adjusted core earnings basis, until fiscal 2023.

Peloton’s forecast for subscriber growth will be in focus Tuesday, analysts say. This will allow Wall Street to gauge how much post-Covid pandemic demand remains for Peloton’s equipment and fitness content.

As of Dec. 31, Peloton reported 2.77 million connected fitness subscribers, which are people who both own a piece of the company’s hardware and pay a monthly fee to access its workout classes. It counts more than 6.6 members in total, including those people who pay for a less-costly, digital-only subscription.

Peloton previously said it expected to end its fiscal third quarter with 2.93 million connected fitness subscribers.

UBS analyst Arpine Kocharyan said in a clients note that he will be looking for Peloton’s subscriber growth targets but also, just as importantly, for any signs that current users could be ditching their memberships.

Peloton’s monthly average connected fitness churn rate, which stood at 0.79% as of Dec. 31, is a metric that allows for analysts and investors to track just that. The lower the churn, the better news for Peloton, because it means people are sticking around and still paying for content.

“What will matter more is management’s commentary on new pricing strategy, customer acquisition cost and impact on churn rates,” Kocharyan said.

The strategic rationale of a potential deal involving Peloton and a suitor also remains a key debate among investors, he added.

Peloton could become a more appealing takeover target if its shares keep falling. The stock hit an all-time low of $14.14 on Monday.

The sell-off came after The Wall Street Journal on Thursday reported that Peloton is targeting potential investors, including industry players and private equity firms, to take a stake in its business of around 15% to 20%. Peloton declined to comment on the report.