Interactive fitness is all the rage, and the shelter-in-place period during the COVID-19 pandemic has accelerated the adoption of connected fitness equipment. Peloton Interactive (PTON -0.32%) is quickly building a powerful brand in the market, effectively using marketing to build brand awareness.
Here's how much money you'd have if you had bought the stock at its initial public offering (IPO) price on Sept. 26, 2019.
Image source: Peloton Interactive.
The rewards of investing in growth stocks
The stock was issued at a price of $29 at the IPO. After three consecutive quarterly earnings reports showing robust revenue growth, the stock has nearly doubled in value.
A $5,000 investment at the IPO price would have purchased 172.41379 shares. Those shares would be worth $8,143 at the current quote of $47.23 at the time of writing.
Investors could have done a lot better, however. In the first month after the IPO, the stock traded in the low 20s. Investors got another opportunity to buy below the IPO price during the COVID-19 market crash in March, when the stock briefly dipped below $20. If you had purchased $5,000 worth of Peloton stock at that level, your investment would currently have a market value of $11,807.
The gain over the last few months would be enough to finance the purchase of one Peloton treadmill ($4,295) and one bike ($2,245).
Momentum is accelerating
Peloton was in a perfect position to capitalize during the shelter-in-place period. Peloton currently generates nearly 80% of its revenue from sales of connected fitness products. The portion of hardware sales to total revenue has trended down from 84% three years ago, as subscription revenue and other sales, including apparel, have risen faster.
In the last quarter, revenue increased 66% year over year. Engagement was through the roof, as you might expect given the circumstances. Average monthly workouts per subscriber jumped 27% year over year to 17.7, showing that more users switched to their Peloton equipment as their main workout option during the quarter.
Management raised its full-year outlook and now expects revenue to increase 89% year over year at the midpoint of the range between $1.72 billion and $1.74 billion.
Peloton should maintain its momentum once the economy reopens and people can return to the gym. Even before the crisis, Peloton was growing incredibly fast, with revenue more than tripling between 2017 and 2019. For the nine-month period ending in March, revenue increased 76% year over year.
The most impressive number has been Peloton's churn rate. Peloton's average net monthly connected fitness churn was 0.46% in the March-ending quarter -- an all-time low. That shows a very tiny percentage of Peloton's connected fitness members canceling their subscription each month. Its 12-month retention rate was 93%. Overall, these numbers indicate a very sticky subscription fitness service that a high percentage of customers are satisfied with.
Peloton is still worth a buy
If you're thinking you've missed out on the opportunity to buy shares at a lower price, consider that Peloton is still very small in a $600 billion global fitness industry. Plus, the company is likely going to get much more profitable than it is now.
The last quarter was Peloton's first quarter of positive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin, which reached 4.5% compared to negative 6.2% in the year-ago quarter. Management expects adjusted EBITDA margin to reach 11.8% in the fiscal fourth quarter. Peloton has a lot of fixed costs going toward studios and instructors that are supporting a growing subscriber base, so revenue should grow faster than operating expenses over time, allowing for margins to gradually improve.
All said, this growth stock still has a lot of gas in the tank.
