Those who were lucky enough to get in on Peloton's (PTON 1.63%) initial public offering (IPO) last September would be sitting on a gain of more than 400% right now. The connected-fitness hardware and software company has thrived during 2020, a year characterized by a global health and economic crisis never experienced in a few generations.

Investors on the sidelines looking to cash in on Peloton's tremendous growth must consider some very important information before hitting the buy button.

Impressive fundamentals

In the recent fourth quarter, Peloton's revenue soared 172% from the prior-year period, reaching $607.1 million. Fiscal-year 2020 was the sixth-straight year the company experienced sales growth of 100%, showing that Peloton was having success even before the coronavirus pandemic forced everyone to stay at home.

As of June 30th, the company had 1.1 million Connected Fitness Subscribers (those who purchased a piece of equipment and pay the $39 monthly fee) and 316,000 Digital subscriptions ($12.99 monthly fee). These figures showed tremendous growth from 12 months ago.

Man on Peloton bike as female walks by.

Image source: Peloton.

Peloton's Connected Fitness Subscribers averaged 24.7 monthly workouts in Q4, compared to just 12 in the year-ago period. Higher engagement is a positive sign, as it demonstrates an increasing value proposition for customers, while also leading to lower monthly churn.

While it's clear that Peloton is excelling in this current environment, investors must consider the longer-term outlook for the company. CEO John Foley believes the company is just scratching the surface on this workout-at-home opportunity: "And 100 million subscribers, we believe, is a reasonable goal. For context, there's close to 200 million gym goers in the world, that's 200 million people paying hard money, month after month to access what we believe to be inferior fitness equipment at an inferior location."

That is quite an audacious goal and something that's certainly in the realm of possibilities. Peloton's business model, characterized by software-differentiated hardware, is allowing the company to build a competitive advantage. The bikes and treadmills are a massive hit with consumers, and the company's focus on bolstering its content and workout catalog is what drives the engagement that I previously talked about.

But anytime the CEO talks about such a lofty goal that is magnitudes higher than where the company currently is, investors need to assess the likelihood of it actually occurring and whether or not the stock price already reflects this extremely optimistic forecast. This brings me to my next point -- valuation.

Expectations are sky high

For long-term investors, the biggest challenge is finding the right company to own in the first place. Peloton has built a booming business that delivers exactly what its consumers need -- effective, high-quality exercises from the comfort and convenience of one's home. I'm a big fan of the company and think there's still plenty of growth in the future.

However, the current price Mr. Market is asking us to pay is not attractive at all. Peloton has a price-to-sales ratio of 20.7, so I see no opportunity right now other than for speculators looking to profit from a momentum trade. Sure, the stock can continue marching higher over the next year, but I think the growth potential is already priced in.

Buyers at such price levels are leaving themselves no margin of safety. A good company doesn't always translate into a good investment.

There's no doubt that Peloton is a fantastic business. Fundamental investors should continue following the company, be patient, and wait until a more enticing buying opportunity presents itself. The stock price is outpacing profitability expectations, and smart investors must avoid the allure of chasing returns that may well prove to be illusory.