Peloton (NASDAQ:PTON) stock was always misunderstood.
Reporters keep calling it an exercise bike company. It’s not. It’s an exercise video company. The bikes, and its treadmills, are the razors. The subscriptions are the blades.
The $2,200 bikes come with a $39 per month membership fee. Peloton also has a stand-alone app that costs $13 per month. That’s the same price as Netflix (NASDAQ:NFLX). It supports streamed sessions on yoga, weightlifting, meditation, biking and running.
If you can’t get out to the gym — and you can’t right now — the Peloton app brings the gym to you. This has made the stock a novel coronavirus winner. The shares are up 60% this year, opening May 13 at over $46 per share. That’s a market capitalization of $13 billion, nine times last year’s sales of $1.4 billion.
Peloton Stock Is a Hot Ticket
Until recently it was very popular to short Peloton stock.
Before the lockdowns began in March, the short interest was over 40% of the trade. That short interest has faded, even while the stock has shot up.
Today the stock is rising on results. For the quarter ending in March Peleton reported a loss of $55.6 million, 20 cents per share, but on revenue of $524.6 million. That’s 66% ahead of a year ago. Best of all, subscription revenue nearly doubled from a year ago, at $98 million against $51 million.
Peloton’s business model appears to be working. The most recent jump is on news that its subscriber count now exceeds 1 million. That’s up from 886,000 at the end of March, meaning growth continues.
Will It Last?
The question is whether this will last, and whether Peloton bikes start gathering dust once we’re allowed to go outside. Comcast’s (NASDAQ:CMCSA) NBCUniversal unit should be counted among the doubters. It sold half its stake in Peloton recently for $178 million.
Many analysts are also backing away from the company as lockdown conditions ease. While 20 of 22 analysts still rate the stock a buy, their one-year price target is just $1.50 short of where it was trading May 13.
During its March quarter conference call Peloton management said they now have 2.6 million members, when equipment owners are added in. This compares with 90 million gym memberships in the countries where it does business – the United States, United Kingdom, Canada and Germany.
The company’s original goal had been to achieve profitability by 2023. CFO Jill Woodworth said it now might come sooner. She projected fiscal 2020 revenue at $1.5 billion, give or take, with gross margins over 40%. Peloton ended the quarter with $1.4 billion in cash or equivalents, and an untapped $250 million credit facility.
The biggest problem for Peloton is the good kind. It’s having trouble meeting delivery schedules due to the virus. The company shouldn’t be supply-constrained, however. It bought one of its Taiwanese manufacturers in October and has more than doubled output since March.
The company’s success is not unique. Sales of home exercise equipment are up 170% during the lockdown.
The Bottom Line
Few things are working right now. There is also a lot of new Federal Reserve cash floating around. The result is that growth — with even a faint whiff of future profit — draws a rush to the rail.
That is what is happening with Peloton stock. The company is executing, and the future looks promising. The valuation has just gotten ahead of itself.
This pandemic will pass. All pandemics do. When it does, Peloton’s growth will approach a long-term normal. We’ll see then what Peloton stock looks like as an investment.
If I owned Peloton now I’d be like NBC Universal, looking to take some profits and maybe waiting for a lower entry point. You don’t have a profit until the cash is in your hand.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
