Peloton Interactive (PTON -2.30%) has been one of the hottest stocks of 2020. The high-end exercise bike maker's stock has nearly quadrupled since the beginning of the year, as the COVID-19 crisis sparked brisk sales of its bikes and tethered more users to its subscription services.
Peloton's numbers were certainly compelling. In fiscal 2020, which ended on June 30, its sales doubled to $1.83 billion, its number of subscribers rose 113% to 1.09 million, and its net loss narrowed from $196 million to $72 million. It also posted an adjusted EBITDA of $118 million, compared to a loss of $71 million a year ago.
That growth continued in the first quarter of 2021. Its revenue surged 232% year over year to $758 million, its subscriptions climbed 137% to 1.33 million, and it posted a net profit of $69 million, compared to a loss of $50 million a year ago. Its adjusted EBITDA hit $119 million, compared to a loss of $21 million last year.
Peloton also remains optimistic about the future. It expects its revenue to rise at least 113% for the full year, its subscriber base to roughly double, and its adjusted EBITDA to grow more than 155%.
How does Peloton make money?
Peloton operates two main business segments. The connected fitness products segment, which sells its exercise bikes and related products, generated 80% of its revenue last quarter. The remaining 20% came from its subscriptions.
Peloton's bike currently costs $1,895, and bundles that add shoes, headphones, bike weights, a heart rate monitor, and other equipment cost up to $2,345. That's significantly pricier than the average exercise bike, which usually costs between $100 and $500.
Peloton's premium bikes can't do much without subscriptions, which link users to video spin classes on its touchscreen. Subscribers who own Peloton hardware pay $39 per month for those classes, while those who don't own the bikes can still pay $13 a month for studio and outdoor classes.
Peloton's business model is similar to Apple's (AAPL 1.01%). Both companies sell premium versions of products that can be bought at much lower prices, then lock in their users with sticky subscription services. That's why Peloton is frequently mentioned as a potential buyout candidate for Apple.
A fad or a secular trend?
Peloton had already established a first-mover's advantage in its niche of remote spin classes when it went public, but the closures of gyms during the pandemic lit a fire under its business.
Peloton's subscribers also worked out a lot more during the crisis. In the first quarter of 2020, each subscriber participated in an average of 20.7 workouts per month, up from 11.7 in the prior-year quarter. It also retained 92% of its existing subscribers over the past 12 months.
But we've seen plenty of other hot first movers, like GoPro (GPRO 0.28%) and Fitbit (FIT), generate explosive growth after their public debuts before stalling out. Both companies saturated their initial markets, struggled with long upgrade cycles, and faced cheaper competitors.
Peloton doesn't face many direct competitors right now, but its moat isn't that wide. In its S-1 filing, Peloton admits it operates in a "highly competitive market" and faces "significant competition in every aspect of our business, including at-home fitness equipment and content, fitness clubs, in-studio fitness classes, and health and wellness apps." Peloton expects that competition to "intensify in the future as new and existing competitors introduce new or enhanced products and services that compete with ours."
Apple's upcoming launch of Fitness+, its $10-per-month subscription service that streams video workouts tethered to the Apple Watch, highlights that risk. If Apple users can simply stream workouts for standard exercise bikes and other equipment on their iPhones, will people still buy Peloton's pricey bikes?
Furthermore, Peloton's average monthly workouts per subscriber declined 16% sequentially in the first quarter, which ended on Sept. 30 and coincided with some gym reopenings across America. Looking ahead, investors should pay close attention to Peloton's sequential growth to see if it can maintain its post-pandemic momentum, or if it's at risk of becoming the next GoPro or Fitbit.
Where will this stock be in a year?
Analysts expect Peloton's revenue to rise 116% this year and for its earnings to more than triple. Next year, they expect its revenue and earnings to rise by 33% and 97%, respectively. Based on those estimates, Peloton's stock trades at six times next year's sales and 164 times next year's earnings.
Those valuations are a bit high, but Peloton is still cheaper than some other high-growth tech stocks. However, uncertainties about Peloton's post-pandemic growth and future competition are still preventing me from touching this hot stock right now. Peloton had a great run and it could still head higher, but it probably won't replicate its gains from this year anytime soon.