Peloton Interactive (NASDAQ:PTON) stock has dropped 30% so far in 2021, and 38% from January highs. To some investors, that decline no doubt looks like an opportunity.
Those investors might not be wrong. Peloton has one of the market’s better growth stories. It’s not just the equipment, of course. Rapidly growing subscription revenue means the fitness company can monetize users well beyond the initial sale.
But, as I always remind investors, it’s critical to look forward. Just because PTON stock has pulled back 30% does not, in and of itself, mean that the stock is cheap.
By most reasonable measures, valuation still leaves something to be desired. And there is a big reason to believe that 2021 performance will fall far short of a hugely impressive 2020. All told, PTON has seen a big pullback, but I still believe long-term investors should stay patient – and hope for an even better entry point.
Yes, PTON stock has pulled back. But even at today’s prices, investors still are paying a premium for the company’s growth. Based on Wall Street estimates for fiscal 2022 (ending June), PTON stock trades at 148x earnings.
Look, Wall Street doesn’t always it get right. The best companies often outperform expectations. But even if you use the most favorable of 25 estimates, PTON still is worth almost 100x next year’s earnings.
Obviously, that’s a huge multiple. And it’s a big multiple for a company that still is largely an equipment manufacturer.
Peloton has an opportunity to grow its subscription sales, certainly. But subscription revenue in fiscal Q2 still represented less than 20% of Peloton’s total.
Valuation alone isn’t reason to enough to dismiss a stock, certainly. And I’m more than willing to pay a premium for the market’s best growth stories. At the least, PTON stock, even after the pullback, requires that premium.
What Does FY2022 Look Like?
And there’s a real question as to whether PTON is one of the best stories. A good story? Absolutely. One of the best? That remains to be seen.
Undoubtedly, Peloton posted impressive performance in calendar 2020. In fiscal Q2, for instance, revenue increased 128% year-over-year. Growth might have been even higher were it not for supply chain issues that are delaying deliveries.
But, obviously, the novel coronavirus pandemic provided a enormous tailwind to the company. Gym closures across the country led demand for home fitness equipment to spike. Peloton’s higher price point left it perfectly positioned with the upper-income demographic that saw a lighter economic effect from the pandemic.
So we know that growth is going to slow. The question is how much.
Peloton was doing well before the pandemic, admittedly. After its Q2 FY2020 release in early February of last year – before the pandemic’s impact was clear – the company guided for 68% revenue growth for the full year.
But even the best growth companies in even normal environments see a deceleration. In FY2022, Peloton is going to see not only the normal deceleration, but brutally tough comparisons and demand that was pulled forward into FY2021.
That doesn’t break the long-term case. But it does raise some short-term concerns. Are investors going to be willing to pay a triple-digit price-to-earnings multiple for a company that doesn’t look like it’s growing all that fast?
Already, we’re seeing “work from home” favorites decline, with PTON just one of many. As reopening continues and the focus stays on the “return to normalcy,” that selling pressure may well continue.
The Case for PTON Stock
Here’s the thing: investors should root for PTON stock to pull back.
From a long-term perspective, there’s still a lot to like here. The recurring subscription revenue will boost the top line. More importantly, it significantly improves profit margins. Wall Street estimates for FY2022 suggest net profit margins in the range of 4%. Expansion of that figure alone can generate significant bottom-line growth in coming years.
Meanwhile, Peloton continues to broaden its reach. The company made three acquisitions late last year that provide expertise in artificial intelligence and digital wearables. All three companies are start-ups; none are guaranteed to be a huge part of Peloton’s going forward. But they’re part of a clear strategy to make Peloton much more than just a manufacturer of in-home equipment.
So I like the long-term outlook here. It’s the valuation and the near term that look a bit more dicey. There’s no need to rush in yet, but if PTON stock continues to get cheaper, there will be a buying opportunity soon.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.