Peloton produces profit for the first time amid pandemic-demand spike, stock pushes toward new record


Peloton Interactive Inc. reported fiscal fourth-quarter earnings Thursday afternoon.


MarketWatch photo illustration/iStockphoto

A year after its initial public offering, Peloton Interactive Inc. is pedaling toward new highs amid a pandemic that is forcing people into their homes and away from gyms, creating demand for at-home fitness equipment.

Peloton
PTON,
-3.75%

on Thursday wrapped up its fiscal year by reporting that sales and subscribers roughly doubled in the 12-month period, and revealed its first profitable quarter as a public company and record quarterly revenue a little less than a year after its September 2019 IPO. Shares fell 3.8% Thursday from Wednesday’s record closing price of $91.17 — more than three times the IPO price of $29 a share — but pushed back toward record highs in after-hours trading following the release of the report, with gains of more than 7%.

Peloton reported fiscal fourth-quarter profit of $89.1 million, or 27 cents a share, on sales of $607.1 million, up from $223 million a year ago. Peloton reported a net loss of $47 million in the fiscal fourth quarter a year ago, just ahead of its IPO. Analysts on average expected earnings of 10 cents a share on sales of $586 million, according to FactSet.

“It has been another staggering year of growth, and I know all parts of the organization have had to work together to do everything possible to meet the incredible demand for our products and services,” Chief Executive James Foley said in a conference call Thursday. “The strong tailwind we experienced in March as the COVID-19 pandemic took hold has continued to propel demand for our products into the fourth quarter and first couple of months of Q1 fiscal year 2021.”

While still attempting to catch up to a flood of orders amid the COVID-19 pandemic — Peloton said Thursday it does not expect order-to-delivery times to normalize until around the end of the calendar year — the company is also looking to expand its customer base. On Monday, Peloton announced that it will reduce the price of its standard exercise bike and introduce a lower-priced treadmill, which could clear a path for potential buyers who were not willing to pay the large upfront costs for its products. It will also introduce a premium bike for fans who want top-of-the-line equipment.

Wedbush analysts noted that in a previous survey of 1,200 people, they found that Peloton could “dramatically improve” sales at a lower price point, especially in treadmills.

“42% of non-Peloton owners that were interested in fitness and familiar with the brand showed some level of interest in a $2,500 Tread, compared to just 30% showing interest in the current Tread,” the analysts wrote in a Sept. 9 note, after Peloton announced its new lineup. “Among existing Peloton bike owners, the number of respondents saying they would be ‘very interested’ in owning a treadmill from Peloton doubles based on the lower price, from 14% based on the $4,295 price point to 28% assuming a theoretical (at the time) $2,500 price point.”

While lower sales prices could hurt hardware margins and average selling prices, much of Peloton’s long-term prognosis focuses on the subscriptions for interactive workout media that owners continue to pay after they have received the equipment. Peloton announced Thursday that it now has 1.09 million subscribers, nearly doubling the 511 million that it reported at the end of its last fiscal year, topping its forecast of 1.04 million to 1.05 million.

In total for the fiscal year, Peloton collected revenue of $1.46 billion from the sale of equipment and $363.7 million from subscription services, up from $719 million and $181 million, respectively, in the previous fiscal year. Combined with other revenue from merchandise and other offerings, Peloton ended the year with $1.83 billion in sales, up from $915 million.

“By the end of FY 2020 our Peloton membership base grew to approximately 3.1 million, compared to 1.4 million members in the prior year,” Peloton detailed in a letter to shareholders Thursday. “Fueled in part by the challenges associated with COVID-19, member engagement reached new highs with 164 million Connected Fitness Subscription workouts completed in FY 2020.”

For the current fiscal year, which began in August, Peloton predicted htat subscribers and revenue would roughly double yet again. The company guided for revenue of $3.5 billion to $3.65 billion, with connected subscribers swelling to 2.05 million to 2.1 million. Analysts on average were predicting revenue of $2.74 billion and subscribers of 1.78 million ahead of the report, according to FactSet.

Peloton stock has gained more than 260% since its IPO; the S&P 500 index
SPX,
-1.75%

has returned 17.7% in that time. In after-hours trading Thursday, shares topped $94 following the release of the report.



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JP Morgan enters green bond push with $1 billion debut debt deal


The San Francisco skyline is obscured in orange haze Wednesday.


AFP/Getty Images

JP Morgan Chase & Co. entered the green-bond world on Wednesday, offloading the bank’s first set of bonds specifically to fund projects with a sustainability bent.

While the banking giant has arranged debt with an environmental or social-good purpose for its clients and other companies, this was JP Morgan’s first $1 billion foray into issuing such bonds on its own behalf.

Many investors welcomed the move, not only because of the weight JP Morgan
JPM,
+0.95%

carries in the market as the nation’s biggest U.S. bank by assets, but also because of a growing acceptance within the U.S. that a climate crisis threatens both environmental and financial instability.

Read: CFTC’s groundbreaking climate-change report sounds a bipartisan alarm on costly risks for U.S. financial system

JP Morgan’s bond deal hit as wildfires raged along the West Coast, with smoke from fires shrouding the San Francisco Bay Area on Wednesday in an eerie orange haze and underscoring how climate change threatens to make extreme fire events, power outages and forced evacuations the norm.

“The more the larger players come along, the larger the scale to move things along faster,” said Steve Liberatore, Nuveen’s lead portfolio manager for environmental, social and governance (ESG) criteria and impact investments.

But Liberatore also stressed that a key part of tackling the unfolding “climate disaster” is to mitigate it in an “economically beneficial way for the average person.”

That can mean achieving a lower cost of capital for renewable energy projects than what’s available for funding fossil fuels.

To that end, JP Morgan was able to pull in pricing Wednesday amid high investor demand, clearing the bonds at a spread of 48 basis points over Treasurys BX:TMUBMUSD10Y, after they initially were floated in the range of 65 basis points.

A bond spread is the level of compensation investors get paid above a risk-free benchmark to act as a creditor, with lower spreads often indicating high demand or a lower expectation of default.

“Generally, green bonds yield less, meaning the cost of financing is lower,” said Pri de Silva, senior corporate credit analysts at Aware Asset Management, adding that JP Morgan priced similar bonds in May that were trading on Wednesday closer to 58 basis points over Treasurys.

“From a funding perspective, I’d say there was a 10-basis-point advantage,” de Silva said, even though he noted the “sunk costs” involved in setting up the new green issuance platform, including providing the “belts and suspenders” to ensure there’s a process in place to track that only eligible projects are funded.

To that end, JP Morgan said proceeds from the debut green bond would finance a range of projects from green buildings to renewable energy, in a public filing.

Notably, the bank also listed areas that will be excluded from the funding from bond proceeds, including coal, oil, gas and nuclear energy projects, as well as activities that involve modern slavery, child labor and human rights exploitation.

Amid an overall corporate debt boom, the second quarter also saw a record $99.9 billion of “sustainability bonds” issued globally, according to Moody’s Investors Service, a category that encompasses green, social and sustainable bonds.

JP Morgan’s debut follows on the heels of Citigroup
C,
+0.70%

and Bank of America
BAC,
+0.11%
,
which issued green and social-good bonds earlier this year.

See: Bank of America sold a first-of-a-kind Covid-19 bond

“Banks are in a unique position to issue green bonds as they are interrelated with the broader economy,” said Brian Ellis, portfolio manager, Calvert Green Bond Fund.

“From an investor’s perspective, growth in green bond issuance provides increased opportunities for portfolio and project diversification, but also the ability to be more selective because there’s a larger group to choose from.”

JP Morgan declined to comment.



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2020 is the year of the SPAC — yet traditional IPOs offer better returns, report finds


After a record 82 initial public offerings of special purpose acquisition corporations — known by the acronym SPAC — 2020 seems to have upended the traditional IPO market, yet most offer lower returns on average than conventional deals, according to a report.

Of 223 SPAC IPOs conducted from the start of 2015 through July, 89 have completed mergers and taken a company public, offering the chance to examine their performance, according to the report from Renaissance Capital, a provider of IPO ETFs and institutional research. Of those 89, the common shares have delivered an average loss of 18.8% and a median return of minus 36.1%. That compares with the average after-market return from traditional IPOs of 37.2% since 2015.

As of July 24, only 26 of the SPACs in that group had positive returns, the study found.

SPACs, also known as blank-check companies, have been around since the 1980s, but have become a juggernaut this year amid high levels of liquidity and a strong appetite for new growth companies.

Don’t miss: The CEO who made one of Silicon Valley’s worst acquisitions wants a $400 million blank check

SPACs raise money in an IPO, and then place it in a trust while the sponsor searches for a business or businesses to acquire, usually within a two-year period. The companies then complete a merger and the target becomes a listed stock. Recent examples include sports-betting operator DraftKings Inc.
DKNG,
-3.31%
,
electric truck maker Nikola Corp.
NKLA,
-1.60%

and space travel company Virgin Galactic Holdings Inc.
SPCE,
-3.69%
.

“It’s a back door to going public and avoiding scrutiny,” said Kathleen Smith, Principal at Renaissance. “You hear about the moonshots, like DraftKings and Virgin Galactica, which have done well, but the average return is negative. You can’t just blindly go in and make money.”

See also: A new breed of tech IPOs may give the stock market reason to party like it’s 1999

DraftKings went public via a merger with SPAC Diamond Eagle Acquisition Corp. and a gambling tech business, SBTech Global Ltd., earlier this year. The renamed DraftKings has been on a tear, gaining 258% in the year to date, even as major sports events were canceled during the pandemic.

Nikola merged with VectolQ Acquisition in June and immediately benefited from the cult status enjoyed by fellow electric vehicle maker Tesla Inc.
TSLA,
+2.78%

, which has propelled that stock to record levels this year. Nikola has gained 232% in the year to date.

See:Former House Speaker Paul Ryan to chair $300 million blank-check company: report

Virgin Galactic’s route to public markets came through a merger with Social Capital Hedosophia last October. The stock is up 35% in 2020, outperforming the S&P 500 ‘s
SPX,
-0.81%

5% gain and the Dow Jones Industrial Average’s
DJIA,
-0.56%

2% loss.

The recent crop of SPAC mergers have performed better than the broader group, the report found. The common shares of the 21 SPAC mergers completed in the period from Jan. 1 to July are averaging a return of 13.1% from their offer price, but that’s mostly due to the two highest performers — DraftKings and Nikola. Without those two, the SPACs produced better returns than in the period going back to 2015, but are still a negative 10.5%. That compares with the 2020 IPO market’s average aftermarket positive return of 6.5%.

The trend isn’t expected to end anytime soon. SPACs have raised a record $31 billion in 2020 to date, and new announcements are coming every day as investors seem to be racing to join the club. The year also brought the biggest-ever SPAC, when billionaire hedge-fund manager Bill Ackman took one public in July with more than $4 billion in its kitty to spend.

At the time, Ackman said he was “long-term bullish” on America and the stock market, although he was bearish on highly indebted companies.

James Gellert, chief executive of Rapid Ratings, a data and analytics company that assesses the financial health of private and public companies, said SPACs are a bull market phenomenon that gain in popularity when markets are doing well, as the stock market was until the recent selloff.

See: The ‘death of valuation’ and what it could mean for investors going forward

“There’s a lot of liquidity looking for nuanced asset classes and SPACs as a sub-category of equity is an interesting one to take a flier on,” he said. “If you have a diverse portfolio, a SPAC that is executed well is like a liquid private-equity investment.”

Many of the companies that are merged into SPACs come from private-equity portfolios, which usually means they are more mature businesses and in better financial health. For investors, they are really betting on the management team of the SPAC finding a good target business.

The broader initial public offering market is expected to be busy through the end of the year, with 45 companies in the current pipeline aiming to raise about $8 billion, according to Smith from Renaissance Capital.

See:Fisker is going public: Five things to know about the electric-car maker ahead of its IPO

Another 65 companies have filed confidentially with the aim of raising $28 billion, boosting the total to a potential 110 deals raising $36 billion.

So far this year, there have been 111 U.S. IPOs, raising $37 billion. The last year to see proceeds of more than that was 2014, when there were 275 deals that raised $85 billion.

“Even if we don’t get to that backlog of confidential filers, we’ll still probably exceed any year going back to 2014,” she said.

That was the year Alibaba Group Holding Ltd.
BABA,
-0.39%

went public, raising $25 billion in the biggest deal ever. That deal is expected to be eclipsed by the flotation of Ant Group, the payments company that was set up to serve Alibaba in 2004 and was spun off in 2011. Ant is expected to list on the Hong Kong and Shanghai exchanges later this year in a deal expected to raise up to $30 billion.

Smith said the pullback in stocks at the end of this week was a positive for the IPO market, “as it puts a bit more fear in the market. Fear gets better pricing, because multiples drop as peers drop and pricing falls,” she said.

Among the deals on tap are Palantir Technologies, the data-mining company backed by tech billionaire Peter Thiel; cloud data-warehouse company Snowflake Computing; videogame technology company Unity Software; Asana, a software provider started by Facebook; construction software company Bentley Systems; telehealth companies Amwell and GoodRx; packaging company Pactiv Evergreen Inc.; and Chinese online internet finance marketplace Lufax, among others.

The Renaissance IPO ETF
IPO,
-1.60%

has gained 49% in 2020 to date.



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Sanofi COVID-19 vaccine to cost below €10 and drug ingredients IPO planned within months, its France chief says


Sanofi’s experimental COVID-19 vaccine will cost less than €10 per shot, the pharma company’s France chief said Saturday.


Eric Piermont/Agence France-Presse/Getty Images

Sanofi
SAN,
+2.34%

stock rose 2.4% on Monday, after a senior executive said the French pharmaceutical giant’s COVID-19 vaccine will cost less than €10 and revealed plans to list its drugs ingredients unit in the next few months.

Olivier Bogillot, Sanofi’s chief in France, told France Inter radio on Saturday that the company’s coronavirus vaccine candidate, being developed in partnership with Britain’s GlaxoSmithKline
GSK,
-1.38%
,
was likely to be priced at less than €10 per shot but that a final price had not been set.

The potential vaccine, a slower effort than many of its peers, began human trials earlier this month, and it is hoped regulatory approval will be reached in the first half of next year.

Read: Sanofi looks to accelerate MS treatment with $3.68 billion Principia Biopharma acquisition

In the meantime, Sanofi is set to publicly list its active pharmaceutical ingredients (API) company, with an initial public offering planned in the coming months, Bogillot told France Inter radio. “The idea is to create a champion of active ingredients at the European level,” he said. The business could be valued at between €1 billion and €2 billion, sources told Reuters in July.

Sanofi announced plans in February to create a standalone company making API by combining its commercial and development activities with six of its production sites in Europe.

The French drugmaker said at the time it would decide whether to list the new company on Euronext Paris by 2022. It would be the world’s second largest API company, behind Switzerland’s Lonza
LONN,
+2.70%
,
with approximately €1 billion in expected sales by 2022, Sanofi said earlier this year.

The company said the spin off would help balance the industry’s “heavy reliance” on Asia for drug ingredients, which was highlighted through the disruption at the beginning of the coronavirus pandemic.



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Of all the major changes to the Dow on Monday, this may be the most important


The Dow Jones Industrial Average will see a handful of important changes take effect Monday morning, but it is, perhaps, the change to how it is calculated that will be the most important for Wall Street over the near term.

Starting at Monday’s open, the so-called divisor — the figure used to determine the influence of any of the 30 components that make up the price-weighted Dow industrials
DJIA,
+0.56%

— will be changed for the first time since April 2019.  

The move is at least partly precipitated by Apple Inc.’s
AAPL,
-0.16%

fifth stock split in its 40 years as a publicly traded company. Apple’s 4-for-1 stock split set off a cascade of changes by the owners of the blue-chip benchmark, S&P Dow Jones Indices, which added Salesforce.com Inc.
CRM,
-1.88%
,
Amgen Inc.
AMGN,
+0.12%

and Honeywell International Inc.
HON,
+1.44%

to the index, replacing iconic Exxon Mobil Corp.
XOM,
+2.39%
,
Pfizer Inc.
PFE,
+0.13%

and Raytheon Technologies Corp.
RTX,
+2.20%

Read: 3 things to know about Apple’s stock split

Because the value of the Dow is determined by calculating the sum of the prices of its components using a divisor that also factors when a company splits its shares, S&P Dow Jones Indices felt compelled to adjust the makeup of the benchmark. Stock splits can swing the balance of influence for any one blue-chip component.

The new divisor is likely to be 0.152 from around 0.147, Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, told MarketWatch. In other words, a $1 price move in any Dow component translates to a swing of 6.579 points, from around 6.8 points.

Apple’s stock split also may have provided an opportunity for the Dow’s managers to readjust the 124-year equity gauge to better reflect the rapid rise of technology in the broader market in the face of the COVID-19 pandemic. Apple’s split shrinks the weighting of formerly the most important Dow member, to 3% from around 12%, and the overall technology representation in the index to around 20% from 27%. (The addition of Salesforce to the Dow will bring the share of tech in the index to about 23%).

Information technology is by far the largest sector in terms of weighting in the S&P 500 index
SPX,
+0.67%
,
at 27.5%, as of July 31, for example.

DJIA components as of 8/31/20

$Price Rank

1

UnitedHealth Group

314.37

2

Home Depot Inc.

286.29

3

Salesforce.com

271.10

4

Amgen Inc.

253.12

5

Microsoft Inc.

228.91

6

Visa Inc.

215.71

7

McDonald’s Corp.

214.91

8

Goldman Sachs

207.71

9

Boeing Co.

175.80

10

Honeywell International

168.38

11

3M Co.

165.66

12

Johnson & Johnson

153.64

13

Caterpillar Inc.

143.63

14

Walmart Inc.

140.30

15

Procter & Gamble Co.

138.77

16

Walt Disney Co.

135.54

17

IBM

125.07

18

Apple Inc.

124.80 (split-adjusted)

19

Travelers Cos.

115.89

20

Nike Inc.

112.29

21

JPMorgan Chase & Co.

102.77

22

American Express

102.54

23

Merck & Co.

85.65

24

Chevron Corp.

85.63

25

Verizon Communications

59.26

26

Intel Corp.

50.43

27

Coca-Cola Co.

49.83

28

Dow Inc.

46.05

29

Cisco Systems

42.20

30

Walgreens Boots Alliance Inc.

38.76

Source: FactSet

New entrants in bold

S&P Dow Indices explained the overall thinking of altering the divisor as significant in “the index’s ability to provide a continuous measure of market valuation when faced with changes to the stocks included in the index.”

Apple will be ranked 18th in price on the Dow on a split-adjusted basis, while the new entrants in the Dow will all be within the top 10, led by Salesforce.com at No. 3.

All the interest in moves within the Dow industrials may be surprising to some on Wall Street. More than $11 trillion is indexed to the S&P 500, while around $32 billion was indexed to the Dow as of the end of 2019, according to S&P Dow Jones Indices.

That said, the Dow is by far the most well-known, easily understood index in the world.



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