The shares of Peloton (NASDAQ:PTON) have been on fire in 2020. This year, PTON stock has more than doubled as the Covid-19 pandemic has supercharged demand for the company’s premium, at-home fitness equipment and services.

In financial markets, it’s important to remember that momentum is a real thing. Stock which are rising tend to keep rising. As a consequence, Peloton stock looks like a good buy at this point, especially with positive Covid-19 catalysts at the company’s back.

But it’s also important to remember that valuation is a real thing, too.

And right now, the valuation risks facing PTON stock are big enough that the shares are not worth chasing at their current levels.

Here’s a deeper look.

Estimating the Market

Peloton’s goal is to disrupt the global-fitness market.

That’s a pretty ambitious goal because the global-fitness market is pretty big.

There are about 183 million members of gyms in the world. That number has been and will continue to grow steadily thanks to the elevated importance of fitness as well as increased access to gyms, studios, and the like. By 2030, there will probably be 250+ million people globally who pay to work out.

Most of those people are in developed economies, where the average household size is around 2.5 people. Thus, by 2030, there will be roughly 100+ million households globally paying to work out.

That’s Peloton’s total addressable market: households that pay to exercise.

How many of those households can afford a Peloton bike? Not many. Gym memberships run around $40 per month. Peloton’s connected-fitness program costs the same, plus the multi-thousand-dollar cost  of installing the bike or the treadmill. Given these huge costs, it seems like only households with total income of at least $100,000 could afford a Peloton.

Around 30% of U.S. households make more than $100,000. Assuming that 30% of the 100 million households that pay to work out around the world earn $100,00 per year, that means  30+ million households globally could reasonably afford a Peloton.

That’s Peloton’s serviceable addressable market.

Of that pool, how many will join the Peloton ecosystem? I’d say a fairly high number. Maybe around half. Plus, some households will buy multiple products, like two bikes or a bike and a treadmill.

As a result, my calculations show that Peloton can sell 20 million products by 2030, versus 577,000 in 2019.

Peloton’s Long-Term Opportunity

Let’s say Peloton does sell 20 million products by 2030 (which is an optimistic assumption, to say the least).

On the hardware side of the business, its average selling prices will likely hover around $2,500, and its gross margins on those products will be around 45%.

On the software side, almost all of those 20 million product owners will subscribe to its fitness programs. The prices of that program are about $40 per month. The firm’s gross margins on them should rise to about 75%, which is average for the software sector.

Based on those assumptions, my modeling suggests that Peloton can grow its revenue from less than $1 billion last year to $15+ billion by 2030. Its overall gross margins will reach around 60%. Assuming its profitability rises as it grows, its operating margins will likely climb above 20%.

In that scenario, Peloton’s earnings per share will hit about $7 in 2030.

By that time, Peloton will be a mix of a consumer-leisure hardware business and an interactive-media business. Companies in both those industries tend to trade for around 20 times their forward earnings. Based on that forward multiple, a reasonable 2029 price target for PTON stock is $140.

Discounted back by 10% per year, that equates to a 2020 price target for the shares of under $60.

Big Near-Term and Long-Term Risks

To be clear, PTON stock is presently  trading slightly above $63.50.

And context is important.

That $60 price target is based on what I see as a reasonable best-case scenario for Peloton. There are multiple risks to that best-case scenario.

First, there’s the pandemic. The emergence of the novel coronavrius supercharged demand for Peloton’s equipment. While its disappearance won’t entirely kill the demand surge, the reopening of gyms and the fading of consumers’ fears about getting sick (especially once a vaccine is widely available) will diminish demand for the Peloton. After all, Peloton only sells bikes and treadmills. Gyms offer bikes, treadmills, studio classes, benches, strength machines, squat racks, etc.

Second, there’s the price. At several thousand dollars to install plus $40 per month for classes, a Peloton is not cheap. The high price could keep many fitness enthusiasts from switching to Peloton.

Third, there’s the social aspect. For many, working out is a social experience. It’s something people to do get out of the house, see friends and exercise with others. Peloton tries to replicate that social experience with its classes. But almost everyone would agree that using a Peloton is just not the same as working out with others in person.

Fourth, there’s competition. Because gyms have closed, the at-home fitness space has attracted plenty of interest and money over the past few months. For example, Lululemon (NASDAQ:LULU) just acquired at-home fitness company Mirror. The more money that gets poured into this space, the greater the ability of Peloton’s competitors will be to create disruptive products that challenge Peloton’s market leadership.

The Bottom Line on PTON Stock

Peloton isn’t a bad company. Far from it. The company is changing the huge global fitness market.

But at its current levels, PTON stock is priced for perfection

And given all the risks and challenges this company faces, perfection is unlikely to materialize.

When it doesn’t, PTON stock could  enter  a “look out below” situation.