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Is Peloton Stock a Buy?

By Rick Munarriz - May 26, 2020 at 10:30AM

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The company behind the trendy connected fitness gear is rolling these days. The good times should continue.

Personal fitness isn't typically a hotbed for a spirited debate, but there's probably a good chance that you have a strong opinion of Peloton Interactive (PTON -2.50%) before even diving into a discussion on the company's merits as a potential investment. Peloton's growth is undeniably off the charts, and no one could say that the current shelter-in-place phase of the pandemic isn't fertile soil for the fitness platform's popularity to accelerate. 

However, skeptics will argue that Peloton's bikes and subscriptions are too expensive. They can also knock the altruistic-seeming marketing approach, or bring up the fickle nature of workout equipment. You either love Peloton or hate Peloton. No matter where you stand, let's see if you should buy Peloton stock. 

A woman on a Peloton bike at home while a man walks past.

Image source: Peloton.

Working up a sweat

Bringing home the high energy of a gym spinning class or instructor-fueled fitness workout has never been easier than it is in this digital age of mobile apps. There's no shortage of options, but it's hard to top Peloton. Its stationary bikes and treadmills are tethered to a connected fitness subscription that delivers real-time performance metrics along with leaderboards and live instructor shoutouts. 

Revenue rose a sweat-inducing 66% to hit $524.6 million in its latest quarter. Peloton had 886,100 subscribers on its connected fitness platform that requires owning a piece of Peloton equipment, a 94% surge over the past year. The plan -- beyond the initial four-figure investment in the stationary bike or treadmill itself -- will set you back $39 a month. It's not cheap, but it's a lot less expensive than most gyms with in-person fitness classes -- and that price covers everyone in your home. The platform's popularity is naturally booming these days with most gyms across the country still closed. In a regulatory filing earlier this month, Peloton revealed that it had topped a million connected fitness subscribers since the end of the quarter that ended in March. 

These machines aren't collecting dust and cobwebs like your George Foreman grill or that workout monstrosity you purchased from a late-night infomercial. The average subscriber put in a record 17.7 workouts a month in the first quarter. Churn is at a four-year low, and 93% of the people that bought a Peloton a year ago are still active. 

It's not just Peloton owners in the ecosystem. Peloton has a digital membership that offers access to its growing library of workouts. It's just $12.99 a month, in line with other workout apps. This is a small part of its business right now with just 176,700 subscribers, and it's growing slower than its connected fitness audience, clocking in 64% higher than where it was a year ago. However, it's an important component of the business. 

Business is understandably booming right now, and Peloton increased its guidance during its early May earnings call. Yes, there are still companies out there that haven't relocated their crystal balls to the attic alongside the Foreman grills and ill-advised infomercial purchases. The midpoint of its range calls for a jaw-dropping 128% surge in revenue for the current quarter, and that's with a growing backlog for its bikes and the temporary suspension of treadmill sales because it can't complete the in-person installation process in the current climate. 

Beyond COVID-19

Growth has picked up the pace, but this isn't just a COVID-19 play. Momentum was obviously there well before we were all stuck at home, snacking away, and clamoring for a high-energy fitness platform to keep us active. All that the pandemic has done is speed up the migration process. 

Short interest on the stock has fallen sharply over the past two months, but there are still plenty of bears out there. The naysayers feel that the product's pricing is out of touch with the masses, even though Peloton's CEO has publicly said that a cheaper stationary bike will be coming out in a year or two. The boobirds also warn about the stock's valuation, and that's a fair knock for a stock that went public at $29 last year, tumbled to the high teens by mid-March of this year, and has nearly tripled off of those lows. 

Peloton isn't currently profitable, and the shares are trading at nine times trailing revenue. However, it's hard to get in the way of a company that is making the most of this moment to pick up the cadence of its already impressive historical growth rate. The stock may not be cheap by any measuring stick, but with guidance and reality exceeding expectations, this isn't the kind of high-flying growth stock that you want to bet against. Peloton stock is still a buy here.

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