With a gain of 6.2% on Nov. 13, Peloton (NASDAQ:PTON) managed to do something other big-name tech unicorns like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) have failed to accomplish. What’s that? It made money for some public shareholders.
The stock went public on Sept. 27 at $29 and closed that day at $25.78. It opened for trading Nov. 14 at $26.20.
It’s time to take profits.
Peloton has gotten over the hump with a mix of technology and quasi-religious fervor. There are stories of people running marathons and quitting therapy because of a stationary bike. The latest spike is built on speculation a rowing machine and cheaper treadmill will soon join the line.
At its current market capitalization of $7.2 billion, Peloton stock is selling for over 7 times its annual revenue. Its latest shareholder letter has lots of pictures. It also sports a $50 million loss.
The Peloton Story
That loss came with a doubling of revenue and subscribers. CEO John Foley insists that profits are around the corner. Bulls compare Peloton to Roku (NASDAQ:ROKU), which became a hot stock after service revenue began exceeding its product sales.
Peloton acquired Gossamer Engineering in May to drive its transformation toward services. Gossamer created devices for Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN) before Peloton bought it. Now Peloton is looking to build apps for the Apple (NASDAQ:AAPL) Watch and the Amazon Fire TV.
Peloton also hopes to bring out a new treadmill next year, closer in price to the $2,000 bike. The current version sells for $4,000. A rowing machine may also be in the works, opening up the upper-body workout market.
The best news may be that Peloton has bought one of its bike manufacturers, Taiwan’s Tonic Fitness. This gives PTON more control over its supply chain and should protect it from the U.S.-China trade war.
Reality Distortion Field
There are reasons why a cloud-connected exercise machine makes sense right now.
Young consumers are attracted to crowded cities where it’s tough to exercise outside. I have been riding for exercise from a suburban-style house most of my life. But the gear is expensive, and the traffic is murder.
My recent solutions are walking and the YMCA, which sports two Peloton bikes and daily spin classes with live instructors. The Peloton machines have a waiting list every evening, and a time limit. Users can measure their progress, and virtual instructors encourage them to keep their legs pumping.
At 64, I’m not in Peloton’s target market. Their ads are filled with young, fit millennials. I’m not spending over $2,000 on a bike and $40 per month in hopes a stationary machine can solve my problems. That’s what Peloton costs. The Y costs my wife and I $82 per month, but it has a variety of machines, yoga classes and a pool.
Foley says his bikes let celebrities sweat anonymously. He effortlessly drops names like Michelle Obama, Ivanka Trump and Under Armour (NYSE:UA, NYSE:UAA) Founder Kevin Plank. But Peloton can also be a social thing, he says, with groups descending on its New York studios to take selfies with their trainers.
The Bottom Line on Peloton Stock
The question investors must ask is how big can Peloton get and how sticky could it be?
Analysts have been pounding the table for Peloton stock recently, with 17 new “buy” ratings. I’m not going to add one.
Peloton may have opened a niche and may have even opened a vein in American culture. But hitting its market cap with sales would mean taking 10% of a highly fragmented, even fickle, exercise market.
I don’t see it.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and AAPL.