Please ensure Javascript is enabled for purposes of website accessibility

Peloton Stock: Buy, Sell, or Hold?

By Daniel Sparks – May 19, 2020 at 10:31AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The connected-fitness product specialist's stock has soared recently. Should investors jump on this stock or steer clear?

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 (PTON -15.17%), 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).

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Peloton Interactive. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Peloton Interactive, Inc. Stock Quote
Peloton Interactive, Inc.
PTON
$6.99 (-15.17%) $-1.25

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
342%
 
S&P 500 Returns
107%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.