Is Peloton the Next Nike or the Next Nautilus?

I saw an article the other day about Peloton (NASDAQ:PTON) that examined whether  Peloton stock is a better buy than Nike (NYSE:NKE). 

Source: Sundry Photography /

I’ll be the first to admit that I was never very bullish on Peloton. To me, it seemed like a fancy, techie version of the age-old fitness bike. Then the novel coronavirus came along and everyone had to have a Peloton. 

So props to the company for being in the right place at the right time. But to suggest Peloton is a better buy than Nike at this point in the exercise company’s development is silly. 

Here’s why.

Nike Just Does It

In the 12 months that ended in February, Nike generated $3.43 billion of free cash flow on $4.32 billion of net income. That’s a free cash flow conversion rate of 79%, which means Nike converts 79% of its net income to free cash flow. 

As states begin to allow retailers to reopen, many customers are rushing to buy Nike’s products in person. Analysts say consumers in Georgia, for example, are brimming with excitement for Nike’s Swoosh. 

“Nike had a line of ~40 people on both Friday and Saturday,” Raymond James analysts wrote in a note to clients recently. “The store was running at capacity (50 people it appeared) and more than 15 people were checking out on both days and at different times (equally registering footwear and apparel).”

In Nike’s fiscal third quarter that ended in February, the sales of the company’s  direct-to-consumer business surged 13%, driven by a 36% increase in its e-commerce sales, which reached $1.4 billion. Although the sales of Nike’s brick-and-mortar stores dropped sharply in Q4, you can be sure its digital sales delivered for its shareholders during the quarter. 

At the midpoint of Peloton’s guidance,  its fiscal 2020 sales would  jump 89% to $1.73 billion. But that’s still only half of the free cash flow that Nike generated in the 12 months that ended in February. 

There can be no mistaking who is David and who is Goliath in this comparison. 

Is Peloton Stock Really Worth $45?

Peloton’s IPO price last September was $29 per share. It lost 11.2% on its first day of trading, but its shares are up 61% so far this year.   

When Peloton launched its IPO, NYU Stern finance professor Aswath Damodaran estimated that the shares were worth between $18 and $19, about 36% below its IPO price. 

“I think the problem here is you have fundamentally a good business model, but I just don’t think it can scale up enough to justify the market cap,” Damodaran said last September. 

“To give Peloton credit, their business model is a little more formed than WeWork’s and Uber’s (NYSE:UBER). It’s the subscription model that eventually is going to make them profitable. … It’s a gift that keeps on giving.”

As part of its outlook for fiscal 2020, Peloton expects to finish its current quarter with at least 1.04 million Connected Fitness Subscribers, 104% higher than during the same period a year earlier. 

In the nine months that ended on March 30, Peloton’s gross margin for its bikes and treadmills was 43%. Its gross margin for its monthly subscriptions was 57.4%. The company’s subscription revenue accounted for 19.9% of its overall sales, up 2.50 percentage points from the same period a year earlier. 

As the professor correctly points out, Peloton can make a great deal of money from its $39.95 monthly subscription fee (it charges $12.99 per month for those who stream its classes without using one of its bikes or treadmills).

While I understand Peleton’s business model, I just don’t see very many people permanently abandoning the gym for an at-home product.

Exercising at home is great for those who are independently wealthy and live in a 4,000 square foot house. But most people are not in that category.

Further, during the Covid-19 pandemic, it’s fine to be isolated, sweating away during a live Peloton class. But once a vaccine is found and the world can return to normal, I just don’t see anyone other than the wealthiest 10% of Americans spending more than $4,000 for Peloton’s bike and another $500 a year on its classes. 

Companies like Nautilus (NYSE:NLS) and Nordic Track have been around for years. They’ve seen their sales ebb and flow as consumers’ desire to get fit at home has risen and fallen. 

While it’s possible that the coronavirus will permanently change the way we get in shape, I suspect people might run more outdoors in good and bad weather. 

Is Peloton the Next Nike or the Next Nautilus?

While Peloton is definitely not the next Nike, I do think it’s got a much better business model than Wayfair (NYSE:W), which may never make money.

As the professor said, Peloton should make money someday. But I don’t see it becoming the next Tesla (NASDAQ:TSLA). That said, I also don’t see it becoming the next Nautilus. 

I wouldn’t buy Peloton stock, but that doesn’t mean you shouldn’t. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.






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