By Geoffrey Smith and Peter Nurse
Investing.com — Peloton Interactive is that rare thing – a disruptive company that is truly changing its sector from a very early stage in its life, and a company that is both fast-growing and profitable.
This popularity has come at a cost, however. Shares of Peloton Interactive Inc (NASDAQ:PTON) have more than tripled in price this year. Its market value is now above $25 billion, which, to put into perspective, makes it more valuable than Nasdaq.
There may be more gains in the short term as the coronavirus bares its teeth once more. But while Peloton may well have growth potential, its sky-high valuation might not make it the best buy right now.
Investing.com’s Geoffrey Smith argues the bull case for Pelton, while Peter Nurse explains the bear argument. This is Point/Counterpoint.
The Bull Case
Peloton does for exercise what Zoom Video Communications Inc (NASDAQ:ZM) does for brainstorming at the office: Its equipment and app take away all the inconvenience of having to leave your home, and yet still provide an acceptable substitute for the traditional shared experience of working in an office, or working out in a gym. The concept may not be equally attractive to everyone, but it is powerfully attractive to many, and that is all it needs to be, in order to succeed.
The figures bear this out: the midpoint of its latest guidance expects 90% growth this year in its Connected Fitness Subscriptions, under which customers both buy the hardware and then subscribe to classes that use the software. That’s going to generate 96% revenue growth and a gross profit margin of 41%.
It’s already gone from having 1.4 million such subscribers to 3.1 million in the last year. That’s a high enough number for the extraordinarily low churn rate of under 1% to be meaningful.
Neither of the two concerns most often raised about Peloton, price and the time-limited benefit of the Covid-19 pandemic, essentially undermine the thesis. Apple Inc (NASDAQ:AAPL) has proved beyond any reasonable doubt that a superior, focused product can command premium pricing well into its life cycle, and the Echelon fiasco this week has only underlined that fact.
Likewise, the trend toward exercising from home – for those with the space to do so – will remain intact because the gains in convenience will still exist even after people lose their fear of infection.
As with Zoom, adoption of the technology is being accelerated above trend, but the fundamentals are compelling even without the distraction of the pandemic.
Naturally, the stock looks expensive, having quadrupled since March. But at Thursday’s closing price of $88.56, Goldman Sachs’s 12-month target price of $110 still represents 24% potential upside. Profitable growth is not cheap in today’s market, but at least with Peloton it looks reasonably well underpinned.
The Bear Case
There’s no doubt Peloton has been one of the success stories of the Covid-19 pandemic. Demand for the company’s expensive stationary bikes has soared as well-heeled Americans have tried to keep fit despite being barred from their gyms.
This popularity pushed Peloton’s market value above $25 billion, and more gains may be ahead. While Peloton may well have growth potential, its stock is currently valued as if it has stunning long-term prospects.
Yet how much longer is this coronavirus pandemic going to last?
On Wednesday, Johnson & Johnson (NYSE:JNJ) announced that it was entering the final stage of its clinical trial to determine if its experimental single-dose Covid-19 vaccine can protect against the virus. This could receive emergency approval by early 2021 if data shows it is safe and effective.
And J&J is only one of a number of companies striving around the clock to develop a workable vaccine.
Turning to the company’s growth potential: When reporting its fiscal fourth quarter results earlier this month Peloton offered up guidance of sales of between $3.5 billion and $3.65 billion for fiscal 2021. The mid-point of that range would result in sales being up 96% from a year earlier — quite a leap.
Yet is that growth really that likely for what is essentially a niche market? After all, how many families can afford a $2,000-plus bike, on top of a $40 per month fee for fitness classes in these straitened times, as well as the space to fit such a bulky item?
Then there is competition. When Peloton went public it listed a saturated fitness and wellness market as being one of the key risks potential investors should consider. Covid-19 quickly diluted the market, but, as discussed before, hopefully it won’t be long before competition heats up again.
On top of gyms physically opening again, a number are establishing a virtual presence, either through their own apps or on YouTube. And these don’t cost $2,000.
Additionally, Peloton’s stock climbed more than 5% earlier this week after Amazon.com Inc (NASDAQ:AMZN) distanced itself from Echelon Fitness, which makes a stationary bicycle similar to Peloton’s at a fraction of the cost.
Peloton might have dodged a bullet this time round, but if the market for this type of product is as valuable as it projects then it won’t be long before Echelon does receive some hefty backing.
With Peloton’s stock at these lofty levels, the company is likely to have to pedal very hard in the near future just to stand still.