I guess this is going to be a seasonal thing now. Peloton (PTON -2.24%) grows, and Citron Research will argue that the high-end fitness specialist is going down to $5. Citron's Andrew Left put out a note late last week, arguing that Peloton will take an 80% hit as Apple (AAPL 1.27%) makes a play for the home-based workout market. Left originally suggested that Peloton stock was going to $5 three months ago.
Left offers Peloton as a top short in 2020, and with the stock down 22% year to date through Monday's close, it may seem like a smart call. However, the market has actually plummeted 26% in this young but brutal year. Peloton is a relative winner this year, and even during Monday's historic drop, Peloton was one of the few gainers with a head-turning 13% pop on the day. On Tuesday, it was tapped as a one of the best investing ideas by Wedbush analyst James Hardiman.
Different opinions are part of the investing process, so let's go into a few reasons why Peloton is unlikely to drop all the way to $5 this year.
Image source: Peloton.
1. Peloton is riding the wave of social distancing
Hardiman at Wedbush argues that Peloton is not only insulated from the current COVID-19 pandemic but actually a beneficiary of social distancing. Just as we're seeing gyms and group fitness classes wind down for at least the next few weeks, the advantages of an interactive yet home-based workout platform have never been more obvious.
This week wasn't the first time that Peloton soared on a Monday as a coronavirus-proof winner during a market sell-off. It's not going to be the last, either. The Peloton platform isn't cheap or perfect, but it's going to be the anecdote for affluent workout seekers coping with cabin fever in the coming weeks.
2. Momentum matters
Peloton was a growth beast even before it became a coronavirus-friendly investment. Revenue soared 77% in its latest quarter. Profitability is still a few years away given where Peloton is in its growth cycle, but with the platform's popularity expanding on a healthy gross margin, it's hard to harp on the red ink.
Peloton's decision to throw the masses a bone -- introducing a cheaper digital subscription offering that isn't tethered to its four-figure treadmills and stationary bikes -- is also taking off as a fitness option. Peloton is leveraging both its aspirational brand and its growing catalog of fitness content to cash in on the mainstream market, and it's working. There are now more than 2 million subscribers across its offerings.
3. Peloton works
It's easy to insert Peloton as a punchline for an "eat the rich" joke, or take shots at its holiday ad for being out of touch, but it's hard to argue with success. Citron's Left argues that Apple working on guided fitness videos for its iOS gadgetry will be another nail in the Peloton coffin, but isn't it also validating the breadth of the untapped market?
Folks that saddle up with Peloton tend to stick around. The monthly churn rate is a freakishly low 0.74% in connected fitness, and probably not a surprise given the sizable investment in hardware. There are smaller rivals out there, but this is where Peloton's brand and scalability come into play. Live workouts with competitive features and call-outs will be hard to duplicate for start-ups.
Peloton's guidance in early February was calling for revenue to slow in the second half of this fiscal year, but this is one of the few companies that should be able to exceed earlier outlooks given the new normal. Peloton stock is trading below last September's debut price of $29 -- investing in IPOs isn't easy these days -- but it's not going down to $5 anytime soon.
