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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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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Airbnb files for IPO that was ‘hard to imagine’ just a few months ago


Airbnb has confidentially filed for an IPO, it announced Wednesday.


AFP via Getty Images

What a difference a few months makes: Home-rental company Airbnb Inc. announced Wednesday that it has confidentially filed for an initial public offering.

The San Francisco-based startup was hit hard by the COVID-19 pandemic as travel came to a halt in many parts of the world in March, with its valuation reportedly dropping from $31 billion to $18 billion a month later. It laid off almost 1,900 employees, or nearly 25% of its workforce, in May. But the company said in a news release after trading closed Wednesday that it had filed a draft registration statement for an IPO — not a direct listing — with the U.S. Securities and Exchange Commission.

“It was hard to imagine in mid-March and April that Airbnb would be going public this year,” Tom White, an analyst with D.A. Davidson, said Wednesday.

With travel for business and pleasure “decimated,” however, the bright spot in the industry has been alternative accommodations and vacation-rental inventory.

“People have been cooped up, and the virus-safe option is renting a house,” White said.

Airbnb has turned to focusing on promoting trips closer to customers’ homes. “I think you’re going to start to see travel becoming more intimate, more local, to smaller communities,” Airbnb CEO Brian Chesky told Axios in June.

Airbnb’s revenue plummeted 67% from the year before to $335 million in the quarter ended June 30, Bloomberg News reported earlier this month, citing a person familiar with the numbers. The company lost $400 million excluding interest, taxes, depreciation and amortization. Airbnb has already raised $2 billion in equity and debt to get through the COVID-19 crisis.

Airbnb did see its bookings situation improve late in the quarter, however, with Bloomberg reporting that bookings dropped 30% in June after a 70% decline in May. That tracks with bookings improvements elsewhere in the industry — Expedia Group Inc.
EXPE,
+2.74%

revealed second-quarter results that were drastically affected by the pandemic at the end of July, but said bookings improved thanks to growth at its Vrbo division, an Airbnb competitor.

“The appetite for secular growth stories is strong in this market,” said Dan Ives, managing director of equity research at Wedbush Securities. “It’s a very complex environment for investors to navigate… with Airbnb being a stalwart of the industry.”

If Airbnb stock begins trading this year as expected, it will join a select crop of big IPOs that have already taken place in an uncertain economy, including those of insurance startup Lemonade Inc.
LMND,
+0.56%

and Warner Music Group Corp.
WMG,
-1.05%
.
Other high-profile companies expected to go public this year include Palantir Technologies Inc. and DoorDash Inc.

Airbnb executives had previously considered a direct listing — which involves no new shares created and allows existing investors to sell their stock directly on public markets — according to reports.



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A tale of two $2 billion Chinese IPOs headed in very different directions


KE Holdings Inc. on Thursday became the first Chinese initial public offering to raise $2 billion from a U.S. listing since iQiyi Inc., then saw its stock soar 87% into the close.

Less than an hour later, iQiyi gave a stark reminder of the rocky path that many young Chinese stocks have walked on U.S. exchanges. Hovering over everything is the possibility that all Chinese companies could soon have to choose between living up to the laws of their own country or allowing U.S. investors greater visibility into their finances.

IQiyi
IQ,
-2.43%

IQ,
-2.43%
,
a streaming company often dubbed the Netflix of China, announced that the Securities and Exchange Commission is investigating allegations that it was inflating its user numbers, revenue and other metrics, and shares plunged to a 12% decline in after-hours trading. IQiyi said it has hired “professional advisers” and begun an internal investigation.

IQiyi went public in March 2018 at $18 a share, and has largely stayed higher than that level on the public markets. It fell lower this past April, though, when Wolfpack Research, a short seller focused on Chinese IPOs, issued an alarming report about iQiyi’s allegedly inflated numbers. Dan David’s firm based its report on in-person surveys of people in iQiyi’s target demographic, credit reports for all related entities and holding companies, and data from two Chinese advertising agencies with access to iQiyi data.

That tale feels too familiar to U.S. investors in Chinese stocks. Not long before Wolfpack’s iQiyi report, Luckin Coffee Inc.
LKNCY,
-3.30%
,
dubbed the Starbucks of China, plunged after similar accusations of over-inflating numbers. Luckin has now lost 94% of its value, and the stock has been delisted from the Nasdaq and is now trading over the counter. Luckin, however, was not the first company to pull the wool over the eyes of investors. According to Stop The China Hustle, a website created by Geoinvesting to draw attention to the issue, U.S. investors have been defrauded of more than $50 billion by publicly traded Chinese companies listed on the NYSE or the Nasdaq over the past 10 years.

More from Therese: The cautionary tale of Luckin Coffee

While Chinese IPOs are required to file financial statements and other corporate filings with the SEC, they are extremely risky for investors. These companies have complex business structures created to evade both litigation from investors and repercussions from the Chinese government, which prohibits foreign investment in certain types of Chinese companies, including technology firms. In addition, their auditing firms do not have access to what is called the working papers of the company, so they can only conduct their audits based on materials they are given by company executives.

Chinese deals are starting to get attention in Washington, with the Senate passing the “Hold Foreign Companies Accountable Act” in May. But the current heavy-handed approach, which seeks to de-list companies that do not allow for audit inspections after three years, would actually further hurt U.S. investors. In addition, as relations between the U.S. and China continue to deteriorate, the latest legislative efforts have been described by some pundits as attempting to advance foreign policy under the guise of securities laws, according to scholars at the Cato Institute, a Washington think tank.

Also read:Washington is finally paying attention to Chinese IPOs, but Wall Street may pay the consequences.

Yet nothing stops the constant parade of Chinese companies on Wall Street. According to Renaissance Capital, which tracks IPOs and manages IPO ETFs
IPO,
+0.88%

IPOS,
-0.33%
,
18 Chinese companies, including KE Holdings
BEKE,
+87.20%

, have gone public so far this year, raising $5.5 billion, excluding blank-check companies (yes, China is getting involved in those too). That compares with 13 deals that raised $2.7 billion in the same time frame last year. So far this year, Chinese companies have already raised more cash than the full year of 2019, when 25 companies raised $3.5 billion, according to Dealogic.

See also: The CEO who made one of Silicon Valley’s worst acquisitions wants a $400 million blank check

Investors clearly cannot get enough of Chinese initial public offerings. Since they missed the boat on the real Netflix and many other now-hot tech companies in the U.S., they are hoping to catch the upside on a copycat company with an even more massive addressable market in China. But until these companies are held to the same accounting standards as U.S. companies, they will always be much higher risk because it is easier for executives to fudge or fabricate numbers with fewer safeguards and watchdogs. Investors need to be cognizant of the big risks.



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