Stock Analysis & Ideas

Apple or Amazon: Who Will Ride the Peloton Bike?

Shares of Peloton Interactive (PTON) are up 7.4% over the past five days, ever since news emerged that Peloton could be up for a takeover and Amazon (AMZN) and Nike (NKE) had expressed interest in the company.

While shares are on an upswing ever since this news came out, the stock has seen a sharp sell-off, with the stock plunging in the past month by 13.4% and by 79.5% in the past year alone. This fall in the stock price has been driven by a combination of factors, including moderation in growth, difficult year-over-year comparisons, uncertain demand trends, commodity price inflation, and supply-chain headwinds.

The company released its preliminary results for Fiscal Q2 late last month, wherein its total revenues came in at $1.14 billion, at the lower end of its guidance of $1.1 billion to $1.2 billion. Peloton ended Fiscal Q2 with fitness subscriptions of around 2.77 million, below its earlier outlook of 2.8 million to 2.85 million.

Peloton is expected to announce its Fiscal Q2 results today. John Foley, Co-Founder, and CEO had stated in its preliminary earnings press release, “As we discussed last quarter, we are taking significant corrective actions to improve our profitability outlook and optimize our costs across the company.  This includes gross margin improvements, moving to a more variable cost structure, and identifying reductions in our operating expenses as we build a more focused Peloton moving forward.”

While it remains to be seen how PTON’s Fiscal Q2 eventually turns out, for now, let’s take a look at PTON’s potential suitors, Amazon and Apple (AAPL). Using the TipRanks stock comparison tool, let’s size up these two potential acquirers for Peloton and see what Wall Street analysts are saying about these stocks.

Amazon (NASDAQ: AMZN)

If Amazon is interested in Peloton, is the retail giant looking at digitizing health and wellness? Possibly.

According to the Wall Street Journal, which first broke the news about Amazon’s and other potential suitors’ interest in Peloton, snapping up Peloton could give Amazon access to PTON’s users and their data, “and a big boost in the burgeoning market for health and wellness technology.”

It is relevant here to note that Peloton has been a disruptor in the fitness industry, with a subscription platform that is equipped with proprietary network software and streaming digital wellness and fitness content. The company generates most of its revenues through the sale of its connected fitness products, including Bike+, Peloton Bike, Tread+, and the Peloton Tread, along with the recurring subscription revenue associated with these products.

The report also pointed out that Amazon could help PTON address supply chain issues through AMZN’s logistics business, or it could also bundle a Pelton subscription with AMZN’s Prime membership.

Peloton had indicated on its Fiscal Q1 earnings call that it had been facing certain difficulties sourcing certain component parts since August last year.

Truist Securities analyst Youssef Squali believes that PTON has “clear and material synergies with Prime” and PTON could grow its subscribers with Amazon’s reach. The analyst added that AMZN could view content from Peloton as a “competitive differentiator” after AMZN announced recently that it would raise the price of its Prime membership program.

The analyst is sidelined on Peloton with a Hold rating and a price target of $68 (128.6% upside) on the stock.

In contrast, BMO Capital analyst Simeon Siegel has a differing view on AMZN as a potential acquirer. The analyst pointed out that PTON’s strategy of reducing its prices to fuel demand for its bikes would not work for AMZN.

The analyst added, “Discounting/incorporating subscriptions into Prime would effectively erode that value [value of PTON if AMZN acquires it]. We believe PTON should ‘sell less and charge more,’ not cut prices further.”

Indeed, Peloton had stated on its Fiscal Q1 earnings call that while the price declines “significantly improve our e-commerce conversion rate, in fact, greater than we expected, but not enough to offset the year-over-year declines we have seen in overall traffic.”

As a result, analyst Siegel has rated PTON a Sell with a price target of $24 on the stock.

When it comes to AMZN, analysts are bullish on the stock with a Strong Buy consensus rating based on 32 Buys. The average Amazon stock prediction of $4,201.17 implies upside potential of approximately 33% to current levels for this stock.

Apple (NASDAQ: AAPL)

Apple is another name that has been bandied about as a potential acquirer. Wedbush analyst Daniel Ives stated that he would be “shocked” if Apple were not involved aggressively in a potential deal for Peloton.

According to the analyst, if AAPL does go on to acquire Peloton, it would be a “major strategic coup and catalyze the company’s aggressive health and fitness initiatives over the coming years.” Ives pointed out that PTON’s current 2.8 million subscribers would be a “very strong/unique competitive moat” for AAPL and it would both be a defensive and offensive acquisition.

Elaborating further, the analyst pointed out that on the defensive front, other potential suitors including AMZN, Nike, Disney (DIS) or AAPL could venture into the health and fitness arena through this acquisition, and cross-sell their services into the PTON ecosystem.

On the offensive front, according to Ives,  if Apple were to decide to potentially acquire Peloton, it would be able to effectively use Peloton services through its fitness and subscription services and Apple Watch, effectively bulking up “its healthcare initiatives which have been a key strategic linchpin for Cook.”

The analyst has pegged Peloton acquisition in the range of $12 billion to $15 billion and added, “Peloton is a unique asset that would fit well into Apple’s golden consumer ecosystem which makes us believe Cupertino could be a real bidder for this asset.”

Ives is bullish on Apple with a Buy rating and a price target of $200 (16.5% upside) on the stock.

Other analysts on the Street are also upbeat about the stock with a Strong Buy consensus rating based on 24 Buys and 5 Holds. The average Apple stock prediction of $192.18 implies upside potential of approximately 12% to current levels for this stock.

Bottom Line

It remains to be seen whether demand persists for Peloton’s bikes at today’s Fiscal Q2 results and whether it is really on its way to being acquired.

As BMO Capital analyst Simeon Siegel put it, there are reasons to be “wary about the value PTON would bring any of the cited companies, given its comparably small size, faltering demand, and declining engagement.”

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