The coronavirus pandemic has had a bifurcated impact on the economy, with some industries getting hit hard by shutdowns of physical stores and travel restrictions and others benefiting from work-from-home trends and increased internet usage. One beneficiary of these unusual circumstances surrounding COVID-19 is Peloton Interactive (NASDAQ:PTON), a fast-growing company that sells connected fitness products, including stationary bikes and treadmills.

Shares of Peloton have surged recently as investors bet on a meaningful boost to product orders and subscriptions to its online classes as consumers are sheltering at home. The company proved these investors right when it reported fiscal third-quarter results earlier this month. Revenue during the period surged past analyst estimates as both product and subscription revenue jumped sharply.

A man riding a Peloton bike

Image source: Peloton Interactive.

Despite the company's strong momentum, investors have good reason to wonder if the growth stock has become overvalued. After all, shares are up nearly 60% since April 1 -- and that's on top of an already pricey valuation. Can Peloton live up to investors' high expectations?

Impressive growth

It's not surprising investors have been cheering Peloton lately. The company saw revenue jump 66% year over year in the third quarter. This was fueled by a 61% increase in product revenue and a 92% jump in subscription revenue. 

Furthermore, the company's higher-margin subscription business grew to represent a larger portion of sales, coming in at about one-fifth of Peloton's top line for the period. Also highlighting Peloton's momentum in subscriptions, member engagement spiked in the company's fiscal third quarter, with average monthly workouts per subscriber coming in at 17.7 -- up from 13.9 in the year-ago quarter. Additionally, Peloton said it has logged 44.2 million connected subscriber workouts, up from 18 million this time last year.

The period, of course, benefited from a powerful combination of a strong January as consumers ramped up exercise and a jump in demand during the last few weeks of the quarter when many people were sheltering at home.

Peloton entered its fiscal fourth quarter with exceptional strength. Demand toward the end of fiscal Q3 was so robust that the company was able to pause cancelable advertising spend because orders for its bike exceeded supply. Peloton also said it expected its fiscal fourth-quarter year-over-year revenue growth rate to accelerate to approximately 128%.

A steep price tag

Despite Peloton's impressive growth, investors should keep in mind that the company's stock price already prices in massive growth for years to come. Today, Peloton's market cap is greater than $12 billion, yet trailing-12-month sales are just $1.44 billion and free cash flow (cash flow from operations less capital expenditures) over this same period is negative $129 million.

To Peloton's credit, the company's gross profit margin has improved markedly since 2017. This suggests there's likely some scalability to the company's business model and that profits could improve as sales climb. This stands to reason since subscriptions -- a higher-margin offering than product sales -- are growing as a percentage of revenue. 

But if the company's subscription growth decelerates meaningfully in the future or if intensifying competition takes a toll on product sales growth, Peloton may fail to live up to investors' high expectations.

Investors may want to steer clear of Peloton stock at its current price despite the company's underlying business momentum, at least until the fitness product specialist can demonstrate a longer track record of moving closer to sustainable and meaningful profitability (relative to its valuation).

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.