Connected fitness company Peloton (NASDAQ:PTON) is on sale and presents a buying opportunity in PTON stock for investors who have a long time horizon.
Down 41% year-to-date and now trading at under $90 a share, PTON stock is nearly 50% below its 52-week high of $171.09. Peloton’s decline comes as the exercise from home trend softens with people returning to public gyms and private fitness centers. There was also a devastating recall of the company’s treadmills, which were found to injure children, resulting in at least one death.
It’s a sharp reversal for a stock that posted a 403% gain in 2020 during the pandemic when gyms were closed, and people were forced to exercise from the confines of their home. While this year’s decline has been painful, smart investors who are patient and willing to hold Peloton shares over the long-term should benefit from building a position with the shares at depressed levels.
Subscription Growth
The highly publicized treadmill recall overshadowed the fact that Peloton continues to perform well with subscriptions to its connected fitness classes rising this year. The New York City-headquartered company reported that its subscription revenue rose 132% year-over-year in its most recent quarter to $281.6 million, and its gross profit from subscriptions increased 159% to $178.1 million.
Peloton is also expanding beyond its core business of exercise equipment, moving into corporate wellness and hotel and resort management. The company clearly sees diversification as key to its future growth.
Much of the decline in PTON stock this year has been based on a perception that the business is slowing. Peloton spooked many investors earlier this year when it warned that the global semiconductor shortage and supply chain bottlenecks would slow delivery of its fitness equipment to customers.
However, the company emphasized in its most recent earnings call that its delivery times returned back to pre-pandemic levels over the summer and are again trending in the right direction. And in an effort to spur sales heading into the busy holiday period, Peloton announced that it is lowering the price of its flagship exercise bike by $400 to $1,495. This move should help boost fourth-quarter sales.
Strong Financials
As already mentioned, Peloton’s financial results continue to be solid despite the perception that the company’s growth is slowing. In its most recent fiscal fourth quarter and full-year 2021 report, which covered the period ending June 30, Peloton announced that its revenue was up 54% to $937 million in the fourth quarter alone. Revenue from connected fitness products grew 35% year-over-year to $655 million, while revenue from monthly subscriptions grew at the aforementioned annualized rate of 132%.
Looking at its balance sheet, it is clear that a lot of the downward pressure on PTON stock is coming from the perception that the company’s growth is slowing, even though the numbers tell a tale of continued growth.
Additionally, Peloton’s gross margin for the fourth quarter was 27%, with hardware coming in at 12% and subscriptions at 63%. The company has made clear that its monthly subscription revenues are underpinning its earnings right now. For this reason, Peloton continues to be willing to discount its exercise bikes and treadmills so that it can recoup money through the high-margin workout subscriptions that clients pay to access online classes.
In its most recent earnings call, Peloton’s management stated bluntly that it expects monthly subscriptions to be the money generator for the company over the long term.
Treat PTON Stock as a Long-Term Investment
Wall Street still believes in Peloton, as evidenced by the median price target on the shares of $130. While the recall associated with its treadmills and the resulting media publicity jolted the stock, in reality, Peloton’s business continues to hold up well even as we emerge from the global pandemic.
Much of the handwringing over Peloton has been due to an inaccurate perception that the company’s core business is slowing as people head back to public gyms to exercise. As its sales remain steady, its subscription revenue grows, and it diversifies into new areas, investors should open a position in Peloton stock and treat it as a long-term holding.
PTON stock is a buy.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
