Peloton Interactive (PTON) is an international fitness consumer products company headquartered in New York, New York. The company offers high-tech fitness products that combine touch screens and internet technology with stationary exercise equipment such as bikes and treadmills. The company further monetizes its products by providing live and on-demand fitness class subscriptions and a digital mobile app.
I am neutral on Peloton Interactive because its strong competitive position and growth momentum are offset by its lack of profitability and continued dependence on issuing new equity to sustain operations. (See Analysts’ Top Stocks on TipRanks)
Strengths
With about 6.2 million members, Peloton has a large user base that can be monetized through subscriptions and product upsells. The company also has adopted a well-integrated omnichannel marketing strategy that combines the best of both bricks-and-mortar retail (via its retail showrooms) and e-commerce (its user-friendly website).
Recent Results
Peloton has faced significant headwinds lately. Data indicates that the company is seeing declining product orders, which led to an underwhelming performance in its first quarter of Fiscal Year 2022. As a result, the company had to raise $1 billion from an equity offering.
While total connected fitness subscriptions surged by 87% to 2.49 million, and paid digital subscriptions soared by 74% to 887,000 during the quarter, total revenue grew by only 6% to $805.2 million.
The company’s gross margin was 32.6%, as Subscription gross margin and Subscription contribution margin led the way at 66.7% and 69.6% levels, respectively. On the other hand, Connected Fitness Product gross margin was 12%. This reflects the need for the company to improve profitability in its fitness product business, and rapidly scale its subscription revenue if it is going to generate significant profitability for shareholders.
The company lost $376 million during the quarter ($1.25 on a diluted share basis), and the adjusted EBITDA margin was -29%, implying that the company still has a ways to go to reach profitability.
Valuation Metrics
Peloton’s stock is difficult to value right now, given that it is still a far way from profitability. Even in Fiscal Year 2022, management is guiding for nearly half a billion dollars in adjusted EBITDA losses (see PTON stock charts on TipRanks).
Wall Street’s Take
Turning to Wall Street, Peloton earns a Moderate Buy consensus rating, based on 14 Buys, 13 Holds, and two Sells assigned in the past three months. Additionally, the average Peloton price target of $83.80 implies 91.2% upside potential.
Summary and Conclusion
Peloton is a leading player in exercise technology and appeals to younger age demographics. As a result, it enjoys immense growth potential, and its subscription business is a great way for the company to strengthen its moat and profitability. Additionally, Wall Street analysts have largely bought into the investment story. The consensus is putting a bullish rating on the stock, with the average price target indicating that the stock could nearly double in price over the next year.
That said, the company remains far from profitability and heavily dependent on equity raises. Therefore, it remains a highly speculative pick because the company will have to continue growing its subscriber base at a fairly rapid clip if it is going to successfully achieve its profitability goals. As a result, investors might be prudent to keep exposure to the stock under control to minimize the risk of heavy losses if the company fails to reach profitability in a reasonable amount of time.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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