MKM Partners Managing Director of Internet & Capital Markets Rohit Kulkarni joins Yahoo Finance Live to discuss Peloton's partnership with Amazon and what it could mean for the struggling company and its business model.

Video Transcript

SEANA SMITH: Peloton shares soaring, up nearly 20%. It's the top trending ticker on Yahoo Finance after reaching a deal to sell its products on Amazon. Joining us now is MKM Partners managing director for internet and capital markets. We have Rohit Kulkarni joining us. Rohit, it's great to see you. So this deal, the Peloton Bike, the Guide and select accessories and apparel are going to be available on Amazon. How significant is this for Peloton?

ROHIT KULKARNI: Clearly, the stock price is saying that it is very significant. Thanks for having me. But from a fundamental standpoint, I think it opens up a new door into Peloton's distribution strategy. They have always sorted out of their own warehouses, own kind of stores, and their own website. Amazon is the largest distributor of all e-commerce products. So I think this is a very big positive step for Peloton. No matter how you cut it, this takes the company forward.

DAVE BRIGGS: And the question of moving forward, but what's next down the road? Some wonder if there will be other retailers to follow. I want to get your thoughts on that, as well as the possibility of Peloton content being streamed on Amazon Prime.

ROHIT KULKARNI: This opens up a lot of possibilities, in my opinion. I think the CEO, the new CEO has shown no signs of-- that he's willing to take risks. What I meant to say is, he has shown a lot of signals that he's willing to take risks with the model, with the business model, with distribution, with the content and everything around it. So he's essentially completely redoing the Apple Card in a way that Peloton could be a big homerun from here on out.

The way I feel about what can Amazon and Peloton do together, I think there is no better set of consumers than Prime subscribers. Amazon and Peloton already worked together on AWS, which is the cloud computing thing. So the synergies between the two companies are getting closer and closer. Amazon is getting deeper into healthcare and fitness. And there is no better company than Peloton with a better brand name. So I feel more positive for Peloton right now, but there could be a halo coming to Amazon, too.

DAVE BRIGGS: Could we be leading to a place where Amazon just buys Peloton outright? They could do it with a change in the cushions.

ROHIT KULKARNI: Absolutely, as in there has been chatter in the past. It's hard to speculate right now. It feels to me that the way the current management, the new management in Peloton-- we have a new CEO. We have a new CFO. We have a new head of strategy. So there is a team that is being put together to help turn around the company, to help turn around the company and get a better position.

So right now, I would be very surprised if there is an acquisition on the table in the near term by that over the next six to nine months. Beyond that, if Peloton is willing to sell on a position of strength, that is more likely than selling in a position of weakness right now.

RACHELLE AKUFFO: And Rohit, we know that Peloton had a number of issues when it comes to PR. We saw what happened with "Sex and the City"-- the "Sex and the City" reboot, some of those things that obviously were out of the control of Peloton. But where does Peloton go from here? Once it starts with Amazon, what does this actually mean for Peloton's growth story?

ROHIT KULKARNI: There are a few recent near-term things that should help Peloton's financials, as in, for example, Peloton is holding on to a lot of old inventory. So now they can put that old inventory into Amazon warehouses. That helps them with the near-term costs. On top of that, I think Peloton is also offering free delivery, as well as free setup. And they started charging for that, remember, back in January.

Now, when it comes to Amazon, they're trying to eat up that cost. So there are certain financial near-term triggers that should help Peloton's income statement in the next six months. Beyond that, we are still unsure what the steady state market demand in a post-pandemic world for Peloton's bikes look like.

So there is still that unclear demand curve. Once we are in a place where the world is, more or less, completely reopened, there are no supply chain shocks, and Peloton is now looking to expand its demand base as such. So near-term, very positive movement for Peloton when it comes to Amazon, but once we get into next calendar year, that is something that we are still unsure of.

SEANA SMITH: Rohit, you have a neutral rating on the stock, a $17 price target. Does this get you off the sidelines? Or what would make you more bullish on Peloton?

ROHIT KULKARNI: I think what would make us more bullish on Peloton is right now, the company does not have a sustainable unit economics. By that, what I mean is when they create-- make a bike, when they want to ship it from overseas, and when they want to get it to your door, the dollar they spend to make a bike, they are spending more to actually get it to your door. That's not sustainable, in my opinion. They are dropping the price of the bike, and hence their gross margins are shrinking.

So as we get out of the pandemic, as we get out of their current issues with production, with supply chain, I think getting a sustainable unit economic model where the cost of the bike and the cost of the subscription is significantly offset by the distribution, perhaps Amazon is the answer. Perhaps that's what they are going to get at. But currently, the business does not feel that they have a sustainable unit economic model. They are somewhere in between right now.

SEANA SMITH: Well, Rohit, we're going to hear from Peloton tomorrow morning. They're out with earnings. The stock off 63% since the start of the year. Subscriptions are going to be in focus. Margins are clearly going to be something that the Street will be watching very closely. What are you expecting to see from Peloton tomorrow?

ROHIT KULKARNI: So near-term, what we have talked about based on our tracking, we do surveys of subscribers. We do surveys of people who are going-- willing to buy Peloton bikes. Near-term, I think there is going to be a slight upside to June quarter. June is one of the slowest quarters for the company. Obviously, it is summer. People are outdoors. It's nowhere close to kind of holiday shopping. So it is a slow quarter, we know that.

But I think from what we think, there is going to be upside to June numbers. It's the end of fiscal year. So what that means is we expect the company to give guidance for the next fiscal year. That's the big unknown. What the next 12 months look like, how the company is looking at that, we think Peloton, it would be prudent for the company to just bring down the numbers, reset the Street expectations, and then build up Street confidence, investor confidence, from there on out.

If that's what the company is going to do, then probably we have a reset moment in the stock right now. And there is a base from which you could look into the long-term. But next year's fiscal guidance is where-- next fiscal year guidance is what we would be focused on and what level of profitability, what the company could get to over the next 12 months. Right now, they're in the cash burn mode. If there is any sign of the company looking to reduce that cash burn over the next six months and beyond and show evidence of that, that's what we would be cheering for.