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Peloton has Wall Street looking over its shoulder

Brian Sozzi
·Editor-at-Large
·8 min read
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Long-time Wall Street analyst Simeon Siegel is a proud Peloton (PTON) subscriber who is always game on for his next sweaty ride with one of his favorite instructors Alex Toussaint.

He concedes the affinity for his digital bike runs deep and has not been shaken during a test (for research purposes, of course) of new Apple Fitness+ content.

“I love the bike, I love the Peloton product — it’s one of my favorite products,” Siegel of BMO Capital Markets tells Yahoo Finance.

Then why does Siegel rate Peloton’s stock an Underperform if the product and overall workout experience is so superior? That doesn’t sound like a very Peter Lynch thing to do.

“Peloton’s stock is at a $55 billion market cap (as of this writing, it’s now down to $47 billion). It’s so much larger than Peloton the business. Peloton’s business still isn’t that large. So the reality is even if Peloton were to not lose a single customer, at some point the market is going to say to Peloton: OK, show us why you deserve to be one quarter of Netflix’s market cap despite having less than 1% of its member base,” Siegel reasons.

In other words, Siegel thinks the fundamentals of the business don’t support the stock’s current valuation. Hence, Siegel’s reservation on the stock price’s outlook.

Although Siegel isn’t alone on the Street in expressing those worries (more on that shortly), it is tough to square the bearishness with a quick look at Peloton’s business at this point in time.

The company became the savior to waistlines in the U.S. last year as the deadly COVID-19 pandemic closed gyms nationwide. That caused Peloton’s order book for bikes and treadmills and quarterly financials to blow up, surprising the hell out of a Wall Street community that had mixed views of the company’s potential since its 2019 IPO.

Peloton’s fiscal first quarter (reported in November 2020) saw total subscribers clock in at 3.6 million, up sharply from 1.6 million in the year ago period. Total revenue surged 232% year-over-year to $757.9 million. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) rose to $118.9 million from a loss of $21 million a year earlier.

For its current fiscal year, Peloton sees total revenue at $3.9 billion “or more” and adjusted EBITDA of $300 million. In its prior fiscal year, Peloton delivered revenue of $1.83 billion and adjusted EBITDA of $117.7 million.

Impressive growth rates by any stretch of the imagination.

But the valuation on Peloton is getting to be tough on one’s analytical eyes even with those recent growth rates and projections for the next 12 to 24 months.

Peloton’s stock exploded nearly 400% in 2020. It’s up another 5% this year, relatively in line with the Nasdaq Composite’s gain. The mind-bending move higher has taken Peloton’s forward price-to-earnings multiple to 333 times — that’s about eight times the average forward P/E on all five well established, still high growth FAANG [Facebook, Amazon, Apple, Netflix, Google) stocks.

All the sell-side analysts Yahoo Finance talked with who cover Peloton uniformly agree the company has a long runway of growth ahead. While they believe 2020 will go down as a landmark year for Peloton, the shift to working out at home, gym bankruptcies and Peloton’s content moat will serve it very well in coming years. But privately, this group of number crunchers are beginning to share mild reservation on the stock’s valuation and acknowledge a short-term top may be looming.

They point to a couple things that could unsettle the super bullish Street view (86% of the 29 analysts that cover Peloton rate it a Buy, according to Bloomberg data) on Peloton.

A projection of a desert scene is casted onto a wall near a Peloton fitness bike in a basement home gym, Tuesday, Sept. 15, 2020, in Lutherville-Timonium. Home gyms have picked up in 2020 with sales of exercise bikes going up during the COVID-19 pandemic. (AP Photo/Julio Cortez)
A projection of a desert scene is casted onto a wall near a Peloton fitness bike in a basement home gym, Tuesday, Sept. 15, 2020, in Lutherville-Timonium. Home gyms have picked up in 2020 with sales of exercise bikes going up during the COVID-19 pandemic. (AP Photo/Julio Cortez)

First are the well-documented issues Peloton is having making enough bikes to satisfy consumer demand.

Peloton’s sales soared so much in 2020 that wait times for bikes dragged out to as long as 11 weeks over the summer, dinging the company’s stock and prompting complaints to the Better Business Bureau over delivery delays. Peloton apologized on the BBB website, blaming delays on “extenuating circumstances.”

The company’s president William Lynch told Yahoo Finance in December that shortening delivery times is like "chasing a moving target" because demand keeps increasing. "We are making huge investments in supply chain, and that includes building out new factories."

Another potential headwind

After that conversation, Peloton revealed on Dec. 21 it would spend $420 million to buy commercial fitness giant Precor to help it make more of its hardware.

As for the analysts Yahoo Finance talked with, they believe it will be some time before Peloton has the inventory issues under control. The problems here range from getting the bikes off boats quick enough due to COVID-19 restrictions to simply making enough bikes inside of factories to meet orders. Supply constraints are having the effect of constraining Peloton’s sales and profits, perhaps to an extent most on the Street don’t appreciate.

“I think the the larger concern is if they can fix the supply chain,” says Rosenblatt Securities analyst Bernie McTernan, who rates Peloton shares a Buy with an $186 price target.

Another potential headwind for Peloton — which analysts think is more of a 12-24 month risk — is the expanding number of well-capitalized players in the connected fitness space. Peloton has created a market, and the rivals are jumping into the pool to grab their fair share of the pie.

Lululemon purchased the popular Mirror platform for $500 million in 2020 and is integrating sales of the digital hardware into its stores, which tend to be positioned near Peloton showrooms. Tonal, maker of a unique connected strength machine, is hot off a $110 million capital raise. Tonal founder Aly Orady told Yahoo Finance the cash will be used to ramp up manufacturing so it could meet robust demand.

And then there is Apple’s digital fitness content. Apple Fitness + launched on Dec. 14, offering studio-style workouts that focus on popular exercise methods like biking, treadmill running, rowing, yoga, dance, and core. The content experience is far removed from what is found on Peloton, Mirror and Tonal. But it’s Apple, and it has a captive audience for everything it does thanks to the installed bases of the iPhone, Apple Watch, etc.

Apple Fitness+ offers a wide range of exercises for every experience level, making it a great alternative to visiting the gym. (Image: Apple)
Apple Fitness+ offers a wide range of exercises for every experience level, making it a great alternative to visiting the gym. (Image: Apple)

“We think Fitness+ could see some benefits from brand recognition and scaled hardware penetration already in place. One feature we found especially interesting is how Fitness+ leverages the Apple Music platform to allow subscribers to easily download songs/playlists from Fitness+ workouts to their Apple Music library. This could also allow for a seemingly more personalized experience and more intelligent curation for music and for the workouts themselves given the cross-app integration and preference data,” says Macquarie analyst Paul Golding.

Golding still fancies that Peloton’s platform is the gold standard in connected fitness, with Apple Fitness+ lacking in community features. He rates Peloton shares a Buy with a $150 price target.

Some of these more bearish factors to the Peloton story were captured in a recent downgrade of the stock to Sell by UBS analyst Eric Sheridan. The stock was dinged slightly on Sheridan’s call.

He joins BMO’s Siegel in being the lone sell-side analysts with a publicly bearish view on Peloton’s stock, reasoning the valuation is too rich.

“With Peloton shares trading at an all-time high, up ~160% over the past 6 months (vs. S&P 500 up ~18%), we downgrade Peloton from Neutral to Sell as we see risk/reward skewed to the downside from current levels when measuring valuation against implied growth. The long-term growth outlook for the company remains positive, as we continue to believe that Peloton is well positioned to disrupt traditional fitness business models. However, we believe the current valuation reflects a high level of confidence from investors on Peloton's ability to deliver outsized operating results (especially amid logistics/operational challenges seen in FQ1),” Sheridan wrote in a note to clients last week.

Sheridan has a $124 price target on Peloton.

Having said all of this, Peloton has a great deal in its favor at the moment. A loyal group of subscribers. A growing subscriber base. Profits, finally. New products (Bike+ and lower priced treadmill) and a wide content moat.

But that doesn’t make the stock indestructible (see sell-off on Sheridan’s downgrade) or worthy of buying at any price. The analyst community is slowly starting to understand this after looking like heroes on the stock last year. Peloton will have to prove at every stop this year that it could deliver quarterly financial perfection. That will be tough to do, but not impossible.

Adds Siegel, “I think that Peloton is now in this stage where they are going to have to look over their shoulder.” Ditto, Wall Street.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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