Peloton will be the ‘long-term leader’ in connected fitness, analyst says

Oppenheimer Managing Director and Senior Analyst Jason Helfstein joins Yahoo Finance Live to outlook an insight on Peloton and Netflix stocks.

Video transcript

ADAM SHAPIRO: OK, a tale of two stocks here. We saw Netflix fall. We talked about this about 10 minutes ago, off about 25% after their earnings report, warning about future subscriber growth. And then yesterday we saw Peloton shares fall dramatically because of the report that they were going to halt production on some of their treadmills and their bikes. And yet today, the stock is up about 13%.

Instead of taking our word for it, let's bring in somebody who understands what they're talking about when you're looking at these things. And that's Jason Helfstein. He's Oppenheimer Managing Director and Senior Analyst. And it's good to have you here.

Let's jump in on Peloton right now. Had a doctor joining us earlier on the talk about COVID-19 that as we get past the peak of omicron, people are heading back to gyms. I guess what I'm getting at is, I'm trying to understand how Peloton stock has gone up today. Any idea?

JASON HELFSTEIN: Yeah, I mean, there's been a lot of negative headlines around Peloton over the past few weeks, discussion about them trying to reduce retail store expenses, potentially cutting compensation. They effectively announced that they were going to stop offering free setup and delivery, which is effectively a bike price increase.

And then another press outlet reported, kind of citing an internal memo, that they were stopping production of new equipment. And we all know that they had a lot of equipment, you can tell based on the balance sheet, sitting around after the end of last quarter. And so the company was actually compelled to pre-announce. And the pre-annoucement just was not as bad as expected.

They basically guided revenue for the quarter in line with the Street. Cash flow was actually better as the losses were better. And then while connected fitness sales were a bit lower, they were 1% below the Street, with net adds 12% below. And they flat out denied that they were halting production. I think they're going to probably delay opening up a new facility in the US.

So I think the worst case scenario is kind of not playing out. And so you had a relief rally in the stock.

EMILY MCCORMICK: Given the decline that we've seen in Peloton shares over the past several months now, ever since, really, their last quarterly earnings results, do you see another company potentially coming in here and buying Peloton outright?

JASON HELFSTEIN: I mean, it's possible. Everyone likes to say Apple. And I mean, they'd do that because if you think about Peloton, it's a premium brand that has kind of a software/hardware combination. And there's like a network effect to it, right? The more people that you know who use it, the more appealing it is. That's kind of how Apple devices are, right?

But if you look, Apple has really-- I think the last major acquisition they did was Beats many years ago. I mean, they're just generally not an acquisitive company. They focus on you internal development.

I mean, look, maybe an Alphabet. I mean they bought Fitbit, more around wearables. But clearly, that's important for fitness. And they're definitely trailing Amazon when it comes to, I think, connected home.

So it's possible. But look, I don't think investors should be buying the stock for a take-out. I would argue that they are the market leader in this. I think it's now clear that this is harder to do than maybe people realize because the pandemic made it look easier. And we can kind of talk about why. But at the end of the day, they'll be the long-term leader. And the valuation is discounting a lot already. And we think the stock will be meaningfully higher from here, 12 to 18 months.

ADAM SHAPIRO: I want to take a look at Netflix too. I'm thrilled about "Ozark." I want to see what happens to the Byrd family. That stock falling, what, 25% after the opening bell today. And I get the concern about subscriber growth. But it's not like Netflix is going to go anywhere. They have so many blockbusters that you've got to have Netflix to watch. And nobody seemed to rebel when they raised prices. So help us understand this drop.

JASON HELFSTEIN: Yeah, I mean, my colleague Ed Kelly is the lead analyst on the stock. But I think, look, Netflix does try to guide to what they really think they're going to do. They're not particularly good at it. Some quarters, they do meaningfully better. Other times, it's worse. The US, they're generally running for revenue.

So they feel they're willing to push through price increases. I think they cited competitive issues internationally. And that's what's driving the stock. But really, this stock isn't a significant focus of mine right now.

EMILY MCCORMICK: Netflix, as usual, is the first of the big tech companies to report quarterly earnings results. Does this report and, more importantly, the reaction that we're seeing from investors right now, does this concern you about what we should be expecting from other major tech stocks after earnings, because we are getting names including Microsoft and Apple reporting next week?

JASON HELFSTEIN: So again, we focus on Facebook, Meta, Google, Amazon, Uber. The question, look, I think we understand that the market has been souring on momentum growth stocks, between interest rates and the way that impacts valuation and when you have a growth stock and you cut the near-term growth estimate, it has meaningful implications for the compounding factor, right?

So generally, the idea is investors will gravitate back to potentially slower-growing companies, where there's less risk of what the outyear revenue and earnings will be and then trade at a lower valuation. So that may be Meta, Facebook, or an Alphabet.

And kind of up until today or two trading days ago, know Facebook was actually performing more like in-line with the market.

Look, we think there's kind of company-specific factors that investors will gauge. I mean, you know the story around Facebook, Meta really is their ability to deal with Apple's changes to the advertising ecosystem, whereas Google, Alphabet is still probably the best reopening play in digital advertising.

And then investors are getting more and more comfortable that their cloud business is starting to scale up. And that's a multiyear trend. And I think if you look at both of those companies, either on an EBITDA or an earnings basis, they're not at any kind of meaningful premium to the market.

And so our sense is that those companies will be fine. I will also say that inflation tends to be also a positive thing for advertising because advertising is usually a percentage of revenue. And so if companies are raising prices because of inflation, they generally will spend more on advertising. Granted, tech companies need to deal with wage inflation, as every other company. But we think that they're better-positioned.

So again this market has basically been driven by a lack of buyers. And we think investors are waiting for some clarity around an earnings outlook. And we think, again, in the internet sector, it's really two weeks from now not next week. But there's definitely a focus on what's the outlook from the biggest companies.

ADAM SHAPIRO: We'd love to get you back in two weeks. And sorry for putting you on the spot with Netflix. But I want to tell you, if you don't watch "Ozark--"

JASON HELFSTEIN: I know you're a big "Ozark" fan. I love the show too. I'm looking forward for it to come back.

ADAM SHAPIRO: Have you seen the trailer, Laura Linney picking-- I don't know if I can say what she's picking out of her hair after the--

JASON HELFSTEIN: Listen, I'm a purist. I don't watch the trailers. I know I enjoyed the first few seasons. So I'll just tune in when the next one's on.

ADAM SHAPIRO: Tonight, I'm there. All right, Jason Helfstein, Oppenheimer's Managing Director and Senior Analyst, all the best.