Morgan Stanley upgrades Zoom Video
“Investor concerns about [small and medium business] churn outweigh the continued growth potential of enterprise business, especially as the platform expands. We believe growth over the next year will surprise to the upside, prompting us to switch to OW,” the note stated.
Zoom Video became one of the most important stocks associated with the work-from-home industry in 2020, but the stock has struggled since peaking in October of last year. The stock has recently entered another downtrend, falling more than 12% since the end of June, despite the fact that the broader market has continued to march toward a string of record highs.
Zoom is set to report fiscal second-quarter results on Monday, which Morgan Stanley believes could help boost the stock in the short term.
“While we believe Zoom is building a durable platform for growth, our call is based less on the platform’s multiyear durability or LT competition threats and more on overdone concerns about SMB churn against a backdrop of investors who want to be more positive,” the note stated.
Activision is a top tech pick
According to Morgan Stanley, the strong pipeline and engaged user base of Activision Blizzard could push shares more than 40% higher. With the stock down 13% this year, the company claimed it was a “aggressive” purchase.
Morgan Stanley’s list of top tech picks outside of the so-called FAANG names now includes the video game maker.
“We expect users, as well as engagement and monetization of these users, to drive long-term growth,” analyst Brian Nowak wrote in a note to clients on Wednesday. “We expect digital in-game content to drive highly profitable revenue growth,” says the company.
Nowak also mentioned the company’s diverse gaming portfolio, which he believes will drive future earnings revisions and multiple upside. He also stated that the stock is currently trading at its lowest price-to-earnings ratio in two years.
Activision Blizzard is being sued for anti-discrimination in California, but Morgan Stanley believes the case will have no material impact on the company.
“These games, in particular, have been in development for many years. According to the firm, “this speaks to how a significant number of developers would need to leave in order to meaningfully derail the development process.”
Peloton reports earnings on Thursday
Thursday after the market closes, Peloton will disclose its fiscal results for the fourth quarter, telling investors how the company manages as customers contemplate the return to the fitness centre.
Peloton outperformed analysts’ earnings estimates a year ago and provided an eye-popping business outlook. Its high-tech cycle and treadmill quickly became two of the hottest commodities for people looking to get some exercise in the midst of the Covid-19 health crisis.
Wall Street jumped on the bandwagon, sending Peloton shares up more than 400% in 2020.
However, the increased demand put a strain on Peloton’s supply chain. Customers who were dissatisfied with the service reported long wait times for their cycles. Peloton announced a $400 million investment in May to build its first factory in the United States in order to speed up production and delivery. This is expected to be operational by 2023.
Analysts are interested in seeing if Peloton can maintain its rapid growth in 2020. The company’s plans include expanding into new markets outside of the United States and introducing new fitness products. Peloton must also invest to retain its existing subscriber base or risk losing them to the local gym or other equipment manufacturers like Tonal and Hydrow.
Peloton shares rose more than 1% on Thursday ahead of the report, but they are down more than 22% for 2021.
Refinitiv analysts polled expect Peloton to report an adjusted loss per share of 44 cents on revenue of $921.7 million in its fiscal fourth quarter.
Investors should pay attention to these three key areas as the fitness tech company releases its latest results.
- Fiscal 2022 projections
Peloton is about to release its fiscal fourth-quarter and fiscal year 2021 results. Analysts and investors anticipate the company will provide guidance for its fiscal first quarter and 2022.
Oppenheimer analysts reduced their price target on Peloton shares to $140 from $150 ahead of Thursday’s results, in part because the firm expects guidance to be on the low end of Wall Street expectations.
Oppenheimer believes Peloton’s fiscal 2022 outlook will be conservative, owing to recent user trends that appear to be disappointing, as well as other uncertainties related to upcoming product launches.
Peloton CEO John Foley has spoken publicly about investing in new machines, and rumors have circulated that one of them will be a rower. However, it is unclear when this will occur or what the products will be. Peloton is also said to be developing its own digital heart rate armband.
According to Oppenheimer, outgoing web visits from Peloton’s website to payment provider Affirm were down 38% in the fourth quarter compared to the third quarter, and 33% in July compared to the previous month. According to Oppenheimer, this particular traffic trend has had an 88 percent correlation with Peloton equipment deliveries in previous quarters.
A drop could indicate that sales of Peloton’s fitness machines are slowing or that deliveries are being delayed.
According to Refinitiv, Peloton’s sales in fiscal 2021 are expected to be $4 billion, representing a 119.4%.
- Treadmill upkeep
Peloton recalled both of its treadmill machines, the Tread and Tread+, in May due to safety concerns. It affected approximately 125,000 Tread+ machines and approximately 1,050 Tread products in the United States.
Before it can resume marketing and selling the machines — and before it can officially launch the less expensive Tread in the United States — the company has been working on a fix for them. Prior to the recall, the Tread machine was only available in the United Kingdom, Canada, and for a small number of people in the United States.
It will also be re-released next week in the United Kingdom and Canada. The machine is scheduled to make its debut in Germany later this fall.
While Peloton’s cycle business far outnumbers its treadmill sales, the Tread and Tread+ represent an additional growth opportunity. These are products that Peloton can sell to existing customers.
Peloton previously stated that the treadmill recall would cost the company $165 million in fourth-quarter sales. It has incurred additional costs by providing full refunds to customers and temporarily waiving membership fees for affected users.
Peloton has yet to provide a timetable for when its Tread+ will be available for purchase. Analysts and investors are hoping to learn what Peloton’s expectations are for treadmill sales once they resume this week.
- Metrics of engagement
Analysts and investors are looking at metrics such as churn rate and workouts per subscriber in addition to revenue and earnings growth to see how the company is retaining users. Peloton has been adding new content, such as meditation and Pilates classes, as well as new instructors, to give users more options.
In Peloton’s most recent quarter, average net monthly connected fitness churn — a measure of subscriber retention.
With gyms across the country either closing or enforcing Covid safety protocols, Peloton subscribers are taking more classes and keeping their memberships.
However, according to BMO Capital Markets analyst Simeon Siegel, these metrics are unlikely to remain this strong indefinitely.
In an interview, Siegel stated, “The engagement metrics are critical to this story.” “I’m not sure if this is going to be the quarter where everyone starts offloading their churn. However, these will be critical metrics. And when they go south, it will be a huge deal.”
Seasonality, according to analysts, can also have an impact on Peloton’s key metrics. People tend to spend more time outside during the summer months, for example, and thus complete fewer workouts on a treadmill or bike indoors. Dana Telsey of Telsey Advisory Group noted that in Peloton’s June quarters in 2018 and 2019, the average number of workouts per user fell 12 percent. However, they increased by 40% in 2020, owing to people staying at home during the pandemic, according to Telsey.
Another factor that the company may mention during its post-earnings conference call this week is a resurgence in Covid-19 cases due to the delta variant. It has the potential to keep more people at home and away from the gym.