Peloton Interactive Condensed Consolidated and Cash Equivalents Case Study

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From its IPO in September of 2019 at $25.24, Peloton Interactive, Inc. (PTON) has seen its fortunes tied to the SARS-CoV-2 pandemic. The stock closed as high as $162.72 per share in December of 2020, only to fall back to $24.60 in January of 2022. Short selling is something investors do when they think the price of a security will go down rather than up. It’s done by borrowing shares from a broker and then selling those shares. The short-seller then holds the cash and when the price declines, buys back the shares of stock and returns them to the broker (along with interest on this ‘loan’). Here is what the L1 Capital Long Short Fund Limited had to say about Peloton Interactive, Inc. in its Q4 2021 investor letter: "Peloton (Short -59%) shares collapsed in November after announcing a large reduction in its June FY22 revenue guidance as part of its first quarter trading update. This was the second consecutive downgrade after the company’s below-consensus update with its FY21 results. Peloton is a connected exercise equipment manufacturer with a cult following in the U.S. The company has been a significant COVID-19 beneficiary with stay-at-home orders dramatically increasing the demand for at-home exercise bikes. We began shorting the company in August 2021 (before the above-mentioned downgrades), when it was trading at ~US$110-120. Our view was that the U.S. was poised to reopen and interest in at-home fitness was diminishing. We saw competitors aggressively enter the market with new offerings at the same time as Peloton’s new treadmill product was marred by significant product issues. We also thought Peloton’s aggressive revenue recognition policies would exacerbate a potential demand slowdown, with small changes in subscriptions having a large impact on upfront revenue and profit generation. The softer demand outlook played out as we expected and the stock price collapsed, which enabled us to cover our short around US$52 per share." Required: 1) Decompose Peloton’s ROE into its component ratios by quarter • Do the following ratios: net profit margin, total asset turnover, return on assets, financial leverage, and return on equity 2) Discuss the overall patterns you see (ignoring seasonality). 3) Compute the same-quarter to same-quarter percentage changes in: • Revenues • Cost-of-revenues • Gross profit 4) Compute the calendar quarter to next calendar quarter changes in: • Revenues • Cost-of-revenues • Gross profit • Income (loss) from operations 5) What do you see that would have prompted L1 Capital to short Peloton’s stock? 6) What do you think prompted L1 Capital to ‘cover’ its short position (i.e. buy back the shares it had sold in order to complete the transaction) at $52 ? Below is an Excel object containing PTON’s recent financial data. Double-clicking on the image will open a spreadsheet where you can perform your mathematical analysis. PELOTON INTERACTIVE - (NASDAQ) PTON CONDENSED CONSOLIDATED BALANCE SHEETS Numbers in Millions S June 30, 2019 ASSETS Current assets: Cash and cash equivalents Marketable securities Accounts receivable, net Inventories, net Prepaid expenses and other current assets Total current assets Property and equipment, net Intangible assets, net Goodwill Restricted cash Operating lease right-of-use assets, net Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses Customer deposits and deferred revenue Operating lease liabilities, current Other current liabilities Total current liabilities Convertible senior notes, net Operating lease liabilities, non-current Other non-current liabilities Total liabilities Stockholders’ equity Common stock, $0.000025 par value Additional paid-in capital Accumulated other comprehensive income Accumulated deficit Total stockholders’ equity Total liabilities and stockholders’ equity $ September 30, December 31, March 31, 2019 2019 2020 (unaudited) (unaudited) (unaudited) 162.10 $ 216.00 18.50 136.60 48.40 581.70 249.70 19.50 4.30 0.80 — $ $ $ 8.50 864.50 $ 1,375.90 $ 100.40 20.90 205.60 46.50 1,749.30 119.70 18.30 4.30 0.80 485.50 9.90 2,387.70 $ 196.70 90.80 206.90 99.20 3.30 290.80 21.40 327.60 147.10 24.10 462.00 483.80 0.40 811.80 1,031.80 0.20 (629.50) 402.50 864.50 $ 2,249.10 (1.10) (672.00) 1,576.00 2,387.70 $ June 30, 2020 September 30, December 31, March 31, 2020 2020 2021 (unaudited) (unaudited) (unaudited) June 30, 2021 September 30, December 31, 2021 2021 (unaudited) (unaudited) 532.80 $ 954.30 22.00 243.60 104.30 1,857.10 159.10 17.00 38.80 1.60 492.10 18.50 2,584.20 $ 509.00 $ 923.70 51.20 194.20 114.50 1,792.70 207.30 17.30 38.10 1.50 484.60 28.00 2,569.40 $ 1,035.50 $ 719.50 34.60 244.50 124.50 2,158.60 242.30 16.00 39.10 1.50 492.50 31.80 2,981.80 $ 1,430.50 $ 592.30 49.90 364.00 146.30 2,583.00 295.50 14.70 39.70 1.50 516.70 26.40 3,477.50 $ 1,248.40 $ 862.10 54.10 522.80 172.60 2,860.00 405.10 38.90 40.80 1.50 537.60 26.50 3,910.50 $ 2,055.90 $ 629.40 30.30 614.20 184.00 3,513.80 473.00 78.50 65.30 1.50 550.70 29.70 4,712.40 $ 1,134.80 $ 472.00 71.40 937.10 202.80 2,818.10 591.90 247.90 210.10 0.90 580.10 36.70 4,485.60 $ 612.60 $ 311.60 81.10 1,269.20 280.70 2,555.10 682.20 238.10 212.70 0.90 684.30 41.30 4,414.50 $ 1,606.90 182.50 $ 165.30 159.60 28.40 535.80 293.20 $ 215.20 31.40 361.70 $ 363.60 33.10 13.90 772.20 275.00 $ 246.70 521.20 50.80 1,093.70 721.40 $ 611.00 41.70 10.20 1,384.40 553.70 29.10 1,676.50 577.50 20.20 1,982.10 855.20 $ 363.70 45.20 18.60 1,282.70 821.50 589.30 25.60 2,719.10 989.10 $ 164.80 61.90 27.20 1,243.00 829.80 620.40 38.30 2,731.50 1,012.80 $ 205.20 70.50 15.20 1,303.70 838.20 726.30 39.50 2,907.60 1,136.00 240.50 80.80 24.40 1,481.70 846.70 743.70 41.50 3,113.60 2,548.90 14.10 (569.60) 1,993.40 4,712.40 $ 2,618.90 18.20 (883.00) 1,754.10 4,485.60 $ 2,748.60 17.10 (1,258.80) 1,506.90 4,414.50 $ 4,048.80 18.30 (1,698.20) 2,368.90 5,482.50 496.10 7.10 1,039.00 2,269.30 3.30 (727.40) 1,545.20 2,584.20 $ 539.90 497.70 14.50 1,052.10 508.20 23.40 1,303.80 2,300.00 0.30 (783.00) 1,517.30 2,569.40 $ 2,361.80 10.10 (693.90) 1,678.00 2,981.80 $ 2,412.90 12.70 (624.60) 1,801.00 3,477.50 $ 2,472.70 16.60 (561.00) 1,928.30 3,910.50 $ 94.70 1,541.30 213.70 3,456.60 737.60 229.20 224.40 87.70 705.50 41.60 5,482.50 CONDENSED STATEMENTS OF INCOME Numbers in Millions S September 30, December 31, March 31, 2019 2019 2020 (unaudited) (unaudited) (unaudited) Revenue: Connected Fitness Products Subscription Total revenue Cost of revenue: Connected Fitness Products Subscription $ 160.80 $ 67.20 228.00 389.10 $ 77.10 466.30 June 30, 2020 426.40 $ 98.20 524.60 September 30, December 31, March 31, 2020 2020 2021 (unaudited) (unaudited) (unaudited) 492.30 $ 114.70 607.00 601.40 $ 156.50 757.90 870.10 $ 194.70 1,064.80 June 30, 2021 1,022.90 239.40 1,262.30 655.30 281.60 936.80 September 30, December 31, 2021 2021 (unaudited) $ 501.00 $ 304.10 805.20 796.40 337.50 1,133.90 89.80 33.10 236.70 32.40 237.40 41.40 269.60 48.80 364.20 65.00 562.80 77.20 732.50 84.80 579.80 103.50 441.00 101.40 745.50 108.30 Total cost of revenue 122.90 Gross profit 105.10 Operating expenses: Sales and marketing 77.60 General and administrative 60.90 Research and development 17.40 Impairment expense Total operating expenses 156.00 Income (loss) from operations (50.90) Other income, net: Interest income, net 1.30 Other expense, net (0.10) Total other income, net 1.20 Income (loss) before provision for income taxes (49.70) Income tax benefit 0.10 Net income (loss) ($49.80) Net income (loss) attributable to Class A and Class B common stockholders ($49.80) Net income (loss) per share attributable to common stockholders, basic ($1.29) Net income (loss) per share attributable to common stockholders, diluted 38,453,864 Weighted-average Class A and Class B common shares outstanding, basic Weighted-average Class A and Class B common shares outstanding, diluted Other comprehensive income (loss): Net unrealized losses on marketable securities Change in foreign currency translation adjustment (1.30) Total other comprehensive income (1.30) Comprehensive income (loss) ($51.10) 269.10 197.10 278.80 245.80 441.20 288.70 429.20 328.70 640.00 424.80 817.40 444.90 683.30 253.50 542.50 262.70 853.70 280.20 160.50 77.50 20.70 154.80 126.90 22.50 84.10 86.30 28.40 114.60 108.60 36.60 177.40 141.10 47.50 208.20 180.60 69.80 229.50 232.10 93.90 284.30 240.30 97.70 258.70 (61.50) 198.70 90.00 259.80 68.90 366.00 58.80 458.60 (13.70) 555.40 (301.80) 622.40 (359.70) 5.90 (0.10) 5.70 (55.80) (0.40) ($55.40) ($55.40) ($0.20) ($0.20) 279,974,823 279,974,823 304.20 (58.40) (0.40) 5.90 (2.90) 2.70 (55.70) (0.10) ($55.60) ($55.60) ($0.20) ($0.20) 280,879,011 280,879,011 349.60 248.70 100.00 7.70 705.90 (425.70) 2.40 (0.70) 1.70 70.60 1.30 69.30 69.30 0.24 0.20 288,719,834 342,101,984 1.90 (0.10) 1.80 60.60 (3.00) 63.60 63.60 0.22 0.18 292,462,184 347,886,695 (3.30) (0.70) (4.00) (17.70) (9.10) ($8.60) ($8.60) ($0.03) ($0.03) 295,646,824 295,646,824 (1.00) 1.50 (9.90) (311.70) 1.60 ($313.30) (8.00) (5.90) (13.90) (373.60) 2.40 ($376.00) ($376.00) ($1.25) ($1.25) 301,161,474 301,161,474 (8.50) (2.10) (10.60) (436.30) 3.10 ($439.40) ($439.40) ($1.39) ($1.39) 317,110,297 317,110,297 ($0.20) 4.70 4.50 ($50.90) ($3.10) 0.10 (3.00) ($58.60) ($1.30) 5.30 4.00 67.50 ($0.60) (2.00) (2.60) ($11.20) ($1.20) 0.20 (1.00) ($377.10) ($0.70) 1.90 1.20 ($438.20) (13.10) 3.10 5.50 89.60 3.70 92.40 $ $ $ $ $ $ $ $ $ ($1.30) 3.90 2.60 71.90 $
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Peloton Case Study
1. Part 1
2. Part 2
3. Part 3
4. Part 4
5. Part 5
6. Part 6


1

Peloton Case Study

Name
Course
University
Instructor
Date

2
Peloton Case Study
Part 1
The decomposed return on equity for Peloton for each of the quarters are computed in the
excel spreadsheet and are shown in the table below:

Quarter

Septem
ber 30,

Decem
ber 31,

Year

2019

2019

Net Profit
Margin
Total Asset
Turnover

21.84%

11.88%

0.264

0.195

-5.76%

-2.32%

2.148

1.515

12.37%

-3.52%

Return on
Assets
Financial
Leverage
Return on
Equity
(DuPont)

Decomposition of Return on Equity
Marc Jun Septem Decem
h 31, e 30, ber 30, ber 31,
202
2020
0
2020
2020
10.60 15.2
%
2%
9.14%
5.97%
0.23
0.203
6
0.254
0.306
2.15
3.60
%
%
2.32%
1.83%
1.69
1.672
3
1.777
1.931
3.60
6.09
%
%
4.13%
3.53%

Marc
h 31,
2021
0.68
%
0.323
0.22
%
2.028
0.45
%

Jun
e 30,
202
1
33.4
4%
0.19
9
6.65
%
2.36
4
15.7
2%

Septem
ber 30,

Decem
ber 31,

2021

2021

46.70%

38.75%

0.180

0.257

-8.38%

-9.95%

2.557

2.930

21.44%

29.16%

Part 2
The net profit margin for Peloton has shown upward and downward trends but for most
of the quarters it has declined. There has been a sudden significant decrease in the last 3 quarters
of 2021 owing to the coronavirus pandemic and the new offering being offered by the
competitors of the company. As a result, the profitability of Peloton eroded in these quarters. The
total asset turnover has followed a good trend overall and Peloton has maintained a goo asset
turnover ratio. This ratio declined slightly in the third quarter of 2021 but increase from 0.180 to
0.257 in the fourth quarter of 2021.
The product of net profit margin and the total asset turnover ratio computed the return on
asset ratio for each quarter. Owing to the negative net profit margin, the return on assets has been
poor in almost all of the quarters, especially in the four quarters of 2021. After this, the financial

3
leverage ratio has been computed. The equity multiplier (financial leverage) ratio shows an
alarming trend for Peloton and it has significantly increased each quarter. This indicates that the
company is using more debt and less equity to finance the assets of the company. The equity
multiplier in the last quarter of 2021 stands at 2.93 which is significantly high and alarming for
Peloton management. Lastly, the return on assets ratio and financial leverage have been
multiplied to compute the return on equity for the company. Owing to the poor return on assets
ratio and alarming equity multiplier ratio, the return on equity for Peloton is poor, especially in
the last three quarters of 2021. The aggressive competition from the comp...


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