Peloton (NASDAQ:PTON) has become a Wall Street darling this year. Once ridiculed for its expensive bikes and holiday commercials, PTON stock has proven its doubters wrong.
Shares are up 250% from its $29 IPO price in September 2019 and 473% from its all-time lows in March.
Is the rally about to run out of steam? The stock is actually down notably from its all-time high near $140. That’s even after the company reported earnings on Nov. 5.
While the stock is digesting its recent gains, there are reasons it can continue higher.
3 Reasons PTON Stock Can Rally
The reasons that PTON stock could continue higher are relatively straight-forward.
First, vaccines may be on the way, but unfortunately for us humans, the coronavirus is still alive and well. As the number of cases continues to climb, local and state governments are being forced into action.
This can include limiting capacities and initiating various states of lockdown. Obviously no one wants this, but it’s what is being done to help curb the virus’ exponential growth. Further, many people do not feel comfortable in group settings — like a gym or spin class — with or without lockdowns in place.
As a result, until the coronavirus is eradicated, Peloton should continue to find growth.
Second, even once the vaccines are being distributed among the public, how many people are heading back to the gym? I’m not calling for the end of the gym or spin class. There is a social element that too many people enjoy to give up for good.
But I don’t find it reasonable to argue that everyone will go back. Like working from home, some or possibly many employees will go back to the office. But there will be a large portion of people that continue to work from home.
I expect a similar result for the workout-from-home group. Particularly those that invested in a Peloton product already and continue to pay their monthly subscription. Does it make sense for them to abandon that subscription for another (via a gym membership) when they can workout from the comfort of their own home?
Finally, this one is a simple but true catalyst for any consumer-products company: The holidays.
With the holidays essentially here and Peloton already experiencing strong demand, one could expect that demand to continue at least through year-end.
Peloton Stock Isn’t Perfect, Though
For as much flack as Peloton got, it actually has a pretty solid business model. Sell an expensive and premium piece of workout equipment (hardware) and charge a recurring subscription rate for the user (software).
These types of companies are generally worth a premium. The hardware is a nice juicy sale, but it’s the recurring revenue model that gets investors excited. Of course, a year ago investors were more skeptical of this particular business. All it needed though was a boost brought on by a global pandemic.
That said, PTON stock is a bit lofty on the valuation side of things.
Even after the stock’s recent pullback, Peloton still commands a market capitalization of $30 billion. That’s almost eight times forward revenue estimates for $3.93 billion.
One-times sales would be expected if Peloton only had the hardware side of the business. Does the recurring revenue portion of it make it eight times as valuable?
In the most recent quarter, total revenue grew more than 230% to $757.9 million. Of that, only about 20% of total sales was due to subscription revenue. Further, the latter “only grew” 133% year over year.
Does this realization stick a fork in the bull thesis? Not exactly. Peloton is still an excellent company, but it only reinforces the idea that, now over $100 per share, PTON stock is not cheap.
A Look at the Technicals
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On the chart, Peloton has obviously taken a hit lately. Long-term bulls may consider starting to nibble on this dip, with the realization that more selling could be on the way.
$100 has been clear support this month. Should it give way, a decline to the 100-day moving average is likely in play.
Above the Nov. 12 high at $112 and PTON stock may fill the gap to $122.50, then possibly put the all-time high in play near $140.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
