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Peloton: A Compelling Play at the Right Price Point

One of the many “story stocks” that crushed it in 2020, Peloton Interactive (PTON) stock has traded sideways since the start of 2021.

Why? First and foremost, there are concerns related to its valuation. Trading at a forward price-to-earnings (P/E) ratio of 375.2x, there’s no denying that shares look frothy at today’s prices. Second, some investors fear that its COVID-fueled growth will slow down once the pandemic finally ends.

Both could affect the stock’s performance in the near-term. However, long-term, PTON’s prospects overall remain bright. As sales of Peloton’s hardware (its $2,000+ stationary bicycles and treadmills) continue to climb, so will sales of its software (monthly subscription to its fitness classes). This could result in billions of high-margin, recurring revenue for the company.

So, where does this leave investors who missed out on its initial epic run? It might not be wise to chase this stock at today’s prices. However, if shares pull back from today’s prices (around $155 per share) to the $100 per share price level, a more attractive entry point may open up.

Two Factors Make Investors Skittish About PTON Stock

What’s holding investors back? Valuation and concerns regarding slowing growth. As mentioned above, shares currently sport a triple-digit P/E ratio due to its success during the COVID-19 pandemic.

Sales could surge nearly 125% from last year’s levels. But with analysts projecting sales growth of 35.6% in the coming year, Peloton’s impressive growth may continue to taper off as the pandemic slowly comes to an end.

Unlike Zoom (ZM), where remote work trends are set to persist post-COVID, it’s too early to say the same for Peloton.

Those buying PTON stock at today’s prices are making a bold bet that it can continue to prove the critics wrong and post better-than-expected results.

At Lower Prices, This Opportunity Looks More Appealing

Right now, Peloton is selling its premium exercise bikes and treadmills faster than they can make them. However, even with its hardware flying off the shelves, this company’s growth story is still heating up.

Why? The real money for Peloton will come from sales of its software, or monthly subscriptions to its fitness classes. Subscriptions will provide a massive and consistent stream of revenue.

How massive? Peloton CEO John Foley believes the company could have 100 million paying subscribers for its service at some point.

Admittedly, this sounds like a bit of a stretch. With 200 million gym-goers worldwide, that implies eventual market share of 50%. That said, a 20-25% market may be more realistic.

If 20-25% market share is ultimately achieved, it would translate to 40-50 million subscribers. With digital membership going for around $13 per month, that’s between $6.2 billion-$7.8 billion per year in possible recurring, high-margin revenue.

This might not be enough to support Peloton’s current valuation ($45.6 billion), but if shares fall back down to $100 per share or less, it could help fuel a rebound for the stock, producing solid long-term gains for investors.

What Analysts are Saying About PTON Stock

According to TipRanks, PTON earns a Moderate Buy consensus rating. This is based on 17 Buys, 3 Holds and 2 Sells assigned in the last three months. Additionally, the average analyst price target is $165.95, which puts the upside potential at 7%. (See Peloton stock analysis on TipRanks)

Bottom Line

As markets remain overheated, it’s hard to be excited about richly priced, but promising, stocks like this one. However, in the event of an overall market sell-off, names like this one could reflect compelling plays.

Shares might have gotten ahead of themselves, but given its long-term prospects, PTON stock could be considered a solid long-term buy if it experiences a significant sell-off in the coming twelve months.

Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

Thomas Niel
Thomas Niel is a freelance writer with an accounting background. An interesting combination to say the least. His understanding of both words and figures pays dividends when writing clear, concise stock analysis.