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Is It Too Late to Buy Peloton Interactive (PTON)?

Sejuti Banerjea

New York-based Peloton Interactive PTON is a company that has combined technology with fitness in a very appealing way. The company was founded in 2012 through a Kickstarter campaign and officially launched the following year. It had its IPO in September 2019.

Here are five things about the company that have me excited.

Unique Selling Proposition

Peloton sells subscriptions to home workouts including activity ranging from cardio and weight training (what you typically get at the gym) to stretching, indoor cycling, indoor/outdoor running and walking, boot camp, yoga and meditation (the last two added in fiscal 2019); media, which includes both music and exercise programs (it produces more than 950 original programs a month); and exercise gear, currently including bikes and treadmills.

The underlying philosophy is to tackle the boredom of carrying out repetitive movements in every way possible and keep you motivated. So there’s music. There’s such a large variety of programs that there has to be something in there for everyone. There’s convenience in that you don’t have to go anywhere (you can work out when and how you like) with the music that you like, using leader boards to keep you on track. Special programs for special situations, such as a dance routine for the whole family during the lockdown are also available. You can also interact with others.

What’s more, a $39-a-month package lets the whole family work out as much as they like through iOS or Android apps. And if you want to use your own equipment you’ll need $19.49 for access to the media library.  

The model is extremely effective and relatively hard to replicate because the uniqueness lies in the media and programming. The more you’re motivated to work out, the better your results, the more data the company has on you, and so, the better it’s able to serve you. And since it’s also an all-you can-eat model, you’ll want to use it more, especially when you’re spoiled for choice. Moreover, the same programs can continue to yield results time and again, leading to very good leverage of R&D and program production cost.

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Retention Mechanism/Strategy

Once you’ve invested in Pelotron equipment, it makes no sense to jump to something else any time soon. And once you’ve been exposed to the whole experience, you’ll likely want to check out what else is on offer. And Peloton makes sure that the process of discovery continues.

In addition, the company takes a community approach, so you get to interact and work out with others. The community building was recently enhanced with a new Tag feature, which lets you choose the kind of people you want to interact with even if you don’t know them already. So you could for instance create a Tag based on shared interest in favorite sports team, college, charity, employer, geography, etc, or choose from the 50,000 Tags users have already created. After filtering the in-class leader board by Tag, you can achieve the exact personal experience you’re looking for.

The success of this interactive/community approach was particularly evident during the pandemic-induced lockdown when despite a total cutback on advertising, word-of-mouth promotion made a very strong quarter possible. Management said that this was likely to be an important driver of future revenue as well, although some advertising would come back later.  

Significant Growth Opportunity Exists

Home workout is a relatively new phenomenon, so there’s very low penetration in the four markets (U.S., Canada, UK and Germany), in which Peloton currently operates.

According to its S1 filing, the company estimates the total addressable market (TAM, representing households interested in buying a subscription fitness program) in its current geographies to be around 67 million households, of which 45 million are in the U.S.

Likewise, its served available market (SAM, representing people interested in existing connected fitness products at current prices) is 14 million households, of which 12 million are in the U.S. Just 4% of the SAM is currently on board.

Seen another way, the International Health, Racquet & Sportsclub Association (IHRSA)-estimated 183 million global gym memberships and 62 million U.S. gym memberships as of 2018 constitutes a market waiting to be disrupted. Management estimates that there are 90 million gym memberships in its four geographies of operation. So even if we assume that at least some people will return to gyms, its current level of 2.6 million subscribers indicates a huge market still remaining to be pursued.

Addresses Broader Trends

A steady growth in personal health and fitness spending over the last decade and employer spending on employee health and fitness more recently, indicate that the TAM continues to expand.

While the under-35 person earning less than $75K is the typical customer, management says that the “average age of our customer is going down pretty significantly”. This is of course extremely encouraging because a younger demographic means there are that many more years to go.   

Very Strong Growth Numbers

The pandemic did have a positive impact no doubt, but it also created some pent-up demand, as Peloton wasn’t able to ship so many bikes. This was despite the fact that treadmills took a back seat in the quarter because in-home installations weren’t possible during the lockdown. Actual growth was therefore in line with seasonal trends.

However, unlike most other companies that had positive outcomes from the pandemic, the impact for Peloton won’t be limited to the March quarter. It will have a positive impact in the current quarter and that impact will also continue thereafter as consumers stay at home more often.  

Note that Peloton saw subscriber growth of 128% in 2018, 108% in 2019 and is on track for another year of triple-digit increase. As co-Founder and CEO John Foley said on the last call, “Six years of triple-digit growth would hopefully lead you to believe that PTON is not a COVID story.” That pretty much sums it up.

Conclusion

As far as catalysts are concerned, they have a new product in the pipeline that they decided not to ship this year, so that one got pushed out. A lower-end treadmill is also on the horizon, though we don’t know when exactly that’ll ship. On the other hand, they have their hands full delivering bikes that seem to be so popular that people are willing to wait for them. They have extended their free trial to 90 days, so there’s likely to be some near-term conversion from that (likely driving the revision to guidance).

The shares are highly overvalued at this point and they’ve traded sideways through May. I’ll be watching this one like a hawk because it must be snapped up on any weakness.

 

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