Frankly, I find it difficult to predict how Peloton Interactive (NASDAQ:PTON) will do as a company. That’s because the exercise bike maker has some powerful strengths and several important weaknesses that will be hard for it to overcome. But given the very high valuation of PTON stock , I’m definitely bearish on the shares.
Among the company’s strengths are its strong brand recognition, its high revenue growth, and its large and growing addressable market. Its weaknesses include the low barriers to entry of its business, its falling gross margins, its lack of profitability, and the hurdles that it will face in the post-pandemic world.
In the wake of last year’s lockdowns, when most consumers could not go to their gyms for many months, almost everyone has heard of Peloton. Personal trainer Paul Landini put it this way in a column for Canada’s The Globe and Mail:
“I’m willing to wager that before 2020 most people hadn’t even heard the word “peloton.” Today, it’s both a common noun (the main body of riders in a bicycle race) and a proper noun (the fancy exercise bike), as well as a verb (“I’m going to Peloton after work”). In only a few years, Peloton has achieved near-universal brand recognition.”
To be sure, the pandemic helped Peloton become a lifestyle brand and helped PTON stock investors get rich, with the 582% gain in the share price from the onset in mid March 2020 through the end of the year. What now?
Strengths Behind PTON Stock
On the revenue front, Peloton’s top line has soared, climbing from $435 million in fiscal 2018 to $915 million in fiscal 2019, $1.83 billion in fiscal 2020, and $4.02 billion in fiscal 2021.
What’s more, for many reasons — including the increased realization of the connection between fitness and health, along with the “selfie” culture — fitness has become tremendously important to most consumers.
Meanwhile, the booms in IT, the financial sector and the stock market, along with the high compensation of many in the public and higher education sectors, have combined to make Peloton’s high prices affordable to more Americans than ever before. Finally, many in America and other countries have become quite comfortable with staying at home most of the time.
The company has low barriers to entry and many competitors. “When you Google ‘Peloton Competitors, ‘you get a slew of options, with the top two articles being “6 best Peloton alternatives for 2021” and “The 8 Best Peloton Bike Alternatives of 2021,”” reported Zacks columnist Daniel Laboe recently.
And in a related trend, Peloton has been cutting its prices meaningfully. For example, the exercise bike maker has cut ” the price of one of its original bikes by $400.” So it’s not surprising that the company’s gross margin tumbled to about 27% in its quarter that ended in June 2021 from about 48% during the same period a year earlier.
Nor is it shocking that its profitability is going in the wrong direction; operating income came in at -$277 million last quarter, way down from positive $91.1 million during the year-earlier period.
Meanwhile, of course, with the pandemic easing and likely to more sooner than later, Peloton is likely to lose some existing and prospective customers who, after being cooped up for a long time, would much rather spend their money on a gym membership than on a Peloton.
Valuation and the Bottom Line on PTON Stock
In the long-term, Peloton could find a way to make its products more attractive than its competitors, enabling it to raise its prices again while still dramatically growing its market share. Or it could keep being hurt by new competitors, including Amazon (NASDAQ:AMZN), causing its market share to stagnate and its bottom line to suffer.
So I’m not sure about the ultimate fate of Peloton. But one thing I am certain about is that the valuation of PTON stock is way too high, given its eroding profitability and the steep risks that it faces. The shares are changing hands for 7.5 times its trailing sales; that’s an exorbitant valuation for a company in Peloton’s tenuous position.
Consequently, I advise investors to sell the shares.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.