Some Wall Street pundits are recommending certain stocks based entirely on a COVID-19 thesis. That's true of connected-fitness equipment company Peloton (NASDAQ:PTON). Many analysts recently slapped Peloton with a buy label. After all, gyms are closed, and people are stuck at home. What better fitness company to buy than one that offers at-home fitness solutions like Peloton?

If investors are considering buying this stock, I see three good reasons underlying a bullish thesis -- and coronavirus hype isn't one of them. However, not every part of Peloton's business is on solid ground as there's one issue that may keep investors on the sidelines for now.

A Peloton bicycle

Image source: Peloton.

1. An engaged and high-growth user base

Peloton has two connected-hardware products: a stationary bike and a treadmill. Priced north of $2,000 and $4,000, respectively, these are premium, branded products. This rich pricing draws comparisons with Apple, but some skeptics question the business model. After all, why would the masses spend so much money on Peloton products when competitors offer cheaper options?

Ironically, Apple has faced the same skepticism over the years. But that didn't keep it from generating $142 billion in iPhone sales in 2019. In many cases, consumers are willing to pay up for a premium product.

In the second quarter of fiscal 2020, revenue from Peloton's connected fitness product segment grew 72% year over year to $381 million, suggesting the company's pricing strategy isn't an issue. And this wasn't an atypical quarter -- product revenue grew 90% and 106% in fiscal 2018 and fiscal 2019, respectively. 

Beyond a quickly growing user base, Peloton owners are highly engaged. Peloton sells an ongoing subscription to its fitness-content library for $39 per month. When Peloton went public, it stated that 92% of people who had ever purchased Peloton equipment were still subscribers. 

A man exercises in his living room using the Peloton app.

Image source: Peloton.

2. A broadening market

Gym owner and franchiser Planet Fitness closed all of its locations until further notice because of the COVID-19 pandemic. Some pundits believe gym closures directly benefit Peloton. However, it's unlikely the coronavirus will meaningfully boost Peloton equipment sales. That's a big purchase for someone paying Planet Fitness' $10 monthly gym fee, and Peloton says equipment shipments are delayed up to four weeks right now anyway.

However, Peloton's app membership might increase in the coming months. For $12.99 per month, subscribers can access Peloton's content library without owning Peloton's equipment. There's little risk for curious consumers with the current 90-day free trial. Still, the home-fitness content space is crowed, and many competitors offer free options as well. 

Consider this: Peloton's management prices the mobile app to merely break even. Why? The mobile app is simply a funnel toward Peloton's equipment and higher-priced subscription. While specifics weren't given, CEO John Foley says it sees "strong" conversion rates from the app to connected fitness equipment.

In my opinion, Peloton's equipment is also just a funnel toward premium subscription revenue. After all, the average lifespan of home exercise equipment is between seven and 12 years, according to The Arizona Republic. That's a long time for satisfied Peloton members to avoid upgrading their equipment. While equipment sales currently make up 82% of the top line, subscription revenue will take a more prominent role once equipment sales growth begins to decelerate. 

Long term, it behooves Peloton to have as many premium subscribers as possible. One way to do that is to broaden its user base with tiered equipment pricing. In its second-quarter earnings call, management said it's working on lower-priced, entry-level equipment. That could open the door for a larger subscriber base.

3. Improving subscription profit, but ...

The premium subscriber base is already impressive -- up 97% year over year to 712,000 as of the fiscal second quarter. During the quarter, the subscription segment gross margin rose to 58%, up from 43% in fiscal 2019. That's because operating leverage is gained when more subscribers are signed up to the same content.

I like Peloton's efforts to engage and grow its user base. And subscription profitability is improving. But those profits can't come soon enough. Peloton lost $55 million in the second quarter alone -- largely attributable to building new showrooms, headquarters, and recording studios. For now, the company isn't guiding for adjusted EBITDA profitability until 2023. That's a long time for investors to wait for non-GAAP (adjusted) earnings.

As a consumer-discretionary stock, Peloton has benefited from only doing business during a time of incredible economic expansion -- it was founded in 2012. Peloton's CFO said 2020 will be a "trough year from a profitability standpoint," but heavy spending may be misguided with the threat of a recession looming.

Personally, I wouldn't buy Peloton today. Let it get beyond this year's peak losses and prove that it can turn the profitability corner. Not all companies do, and it's possible next year will be a challenging economic environment in which to do it.