Peloton Shareholders Are Getting the Last Laugh

Remember when the biggest national controversy was the Peloton (NASDAQ:PTON) ad? You know the one where the apparently fit husband dared to get his apparently fit wife a Peloton bike (which it seemed she clearly asked for). The “Peloton wife” then went on to document her journey of discovery.

Ah, simpler times my friends.

Shares of Peloton climbed over 70% from the middle of October into December, and then gave all those gains back and more when the market crashed in March. The “I told you so” crowd was taking their victory lap (although not on a stationary bike we presume).

Yet here we are closing in on that anniversary of sorts and what do you know? PTON stock is up nearly 22% for the year, and by most accounts, it could be headed higher. Shares of the stock are up over 4% on the day before the company reports its fourth-quarter 2020 earnings. And if analysts are to be believed, Peloton may be ready to post their first profitable quarter since going public.

A Pandemic Winner By a Mile

I’m not going to take my own victory lap. Although I personally saw nothing wrong with the ad, I did have reservations about Peloton, particularly given the robust economy that the United States enjoyed at the beginning of the year.

Peloton faced problems on two fronts. First, there are a lot of fitness enthusiasts that enjoy going to the gym. According to Meredith Poppler, vice president of communications for the International Health, Racquet & Sportsclub Association (IHRSA), “At-home solutions, such as … Peloton and Mirror are great options for some…But for the most part, the best, most well-stocked home fitness option cannot compete with the sense of community and motivation a club provides, nor can it provide the qualified staff, variety of equipment and programming options of the neighborhood gym.”

All of what Poppler says is true. However, the novel coronavirus will have ripple effects that are hard to forecast. We expect that businesses of all types will be placing much more emphasis on personal hygiene when this is all over. But what Poppler doesn’t address is how many individuals go to gyms for the benefits she outlines? And, what happens if those individuals realize they enjoy exercising in the privacy of their homes?

But perhaps the most compelling catalyst for Peloton is that the IHRSA estimates that as many as 25 percent of fitness clubs may be forced to close by the end of the year unless the sector receives Congressional stimulus. With an election just two months away, I’m not saying that’s impossible, but it certainly seems less likely than it may have one month ago.

This was a sentiment expressed by Dana Telsey of Telsey Advisory who reiterated her “outperform” rating for PTON stock. Telsey also raised the price target for Peloton from $82 to $105.

"Once COVID-19 is behind,’ said Telsey, “we expect the high adoption rate of digital fitness to persist and consumers to return to in-person group fitness classes and gyms in lesser frequency than in the past."

And second, the fitness space is crowded and getting even more crowded. With their signature product carrying a $2,500 entry point, I questioned if Peloton had a real moat.

The novel coronavirus gave them that moat. In fact, it built them a mini-fortress. In many areas gyms are still not open. In other areas, gyms were open briefly but got shut down again. And that has turned many gym enthusiasts into Peloton customers. In the company’s previous quarter ending in March, Peloton saw a 12.5% increase in revenue from the prior quarter.

The $524.6 million revenue the company generated put them within striking distance of hitting their initial guidance of $1.5 billion in revenue for their fiscal year 2020. The company was sitting at just over $1.2 billion after the last quarter.

Peloton is Not Resting On Its Laurels

There are still cynics out there to be sure. But Peloton is doing its best to generate as much revenue as it can while a vaccine remains elusive. The company is lowering the price on its signature bike by $350. The company anticipates the new price point of $1,895 will make the bike more accessible. Plus, Peloton is introducing a new premium bike (Bike+) that will have some features of its top-of-the-line $4,295 bike at a much lower $2,495 price point.

Currently, analysts are quick to note that Peloton is having difficulty keeping up with demand for its current product. So it’s unclear how much of a boost they will get from the new models. However, it does suggest that the company will have volume going out the door even as a potential vaccine becomes available.

If I were investing in Peloton, I’d certainly want to hedge my bets. Set a price target of around $100 and look to take some profits there, but give yourself a floor that ensures you get something for your investment. But right now, there’s no reason not to buy the stock. The company is being conservative in its guidance (maybe too conservative for some analysts). But, it’s better to climb over a low bar then trip over the bar that’s beyond your reach.