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3 Things to Expect From Peloton in 2021

By Jon Quast - Dec 20, 2020 at 6:35AM

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If 2020 was indicative of future success, the company needs to have the following things happen in the new year.

There's no doubt about it: Connected-fitness company Peloton Interactive ( PTON -2.02% ) was a stock market darling in 2020. As of Dec. 17, the stock is up 371% year to date. The COVID-19 pandemic closed gyms and had people spending more time at home, causing Peloton's business to boom. No one foresaw this in December 2019.

I'm confident there'll be unforeseen events for Peloton in 2021 as well. We can't predict everything, but here are three things investors should expect from this company in the coming year.

A person jumps from one cliff that says 2020 to another that says 2021.

Image source: Getty Images.

1. New subscriber growth

This has been a blockbuster year for Peloton. Just to keep our timeline straight, the company's fiscal year for 2020 ended June 30; we're currently in the second quarter of its fiscal 2021. Now for the blockbuster numbers: Peloton's fiscal 2020 revenue doubled from fiscal 2019. The first quarter of fiscal 2021 was even better, with year-over-year revenue growth of 232%.

Perhaps emboldened by its recent success, Peloton's management articulated an ambitious vision at its recent investor-day event: It's targeting 100 million subscribers.

The company measures two sets of subscribers: connected-fitness and digital. Connected-fitness subscribers own Peloton hardware, and subscriptions connect those devices. Digital subscribers can stream content via phones or connected TVs, performing workouts that don't require Peloton hardware.

Between these two groups of subscribers, Peloton had over 1.8 million active subscriptions as of the first quarter of 2021. That's a massive runway before reaching its goal of 100 million. Over the past five quarters, its connected-subscriber base hasn't grown slower than 94% year over year -- and in some quarters, it has growth better than 100%.

While it's reasonable for Peloton's subscriber growth to slow in 2021, investors should expect growth to still be stellar considering we're in the early innings of management's ambitious long-term vision. By contrast, if growth begins to rapidly decelerate in 2021, it's fair to wonder how realistic the 100 million goal is.

A woman exercises while watching content from Peloton.

Image source: Peloton Interactive.

2. An improving supply chain

Can you have too much of a good thing? In Peloton's case, its surging popularity left it with an interesting problem: It literally couldn't manufacture its products fast enough. Demand outpaced supply, probably to the benefit of some of its competitors

Some Peloton investors may want to see new hardware products in 2021. After all, many exercise-at-home companies are popping up offering subscription-enhanced products for yoga, rowing, and boxing. But this seems unlikely to happen in 2021 for Peloton. As we just noted, it has all the business it can handle just within the treadmill and stationary-bike categories.

That said, Peloton is expanding its addressable market in 2021 with new products, just in the treadmill and bike categories the company already serves. In this coming year, it will have two versions of both its Bike and Tread at different price points. This should help maintain strong subscriber growth.

But more important here, shareholders should expect the company to solve its supply chain issues in 2021. Peloton is opening a new factory at the end of this year, which should improve delivery times for the lower-priced Bike. And that's particularly good considering management expects the Bike to be its best-selling item in 2021. 

A man touches the screen on a Peloton Bike.

Image source: Peloton Interactive.

3. Crucial post-pandemic metrics

As news began to break about a coronavirus vaccine, Peloton stock pulled back. It's since recovered, but the pullback illustrates a commonly held belief among investors: The company benefited from the pandemic, but only temporarily.

In reality, Peloton was generating triple-digit revenue growth before the pandemic. But more important, its customer-retention metrics have been off the charts since the company's inception. Given the high up-front cost of the hardware, it's reasonable to assume that subscribers will stay loyal even once there's a vaccine, allowing Peloton to keep winning in a post-pandemic world.

Investors should expect Peloton to retain subscribers, but it wouldn't be surprising to see average monthly workouts fall. In fact, this is already happening as life somewhat returns to normal. Subscribers performed 24.7 average workouts per month in the fourth quarter, but "only" 20.7 in the first quarter -- a 16% sequential decline. 

If average monthly workouts keep falling fast, it could spook Wall Street. It seems that some are always looking for a reason to say a growth story is over. Should that happen, it could create a good buying opportunity. Even if average monthly workouts fell to 10, subscribers would still be using their Peloton equipment quite a lot. And as long as customer retention stays north of 90%, this is still a good long-term business model.

In summary, Peloton investors should expect the company to grow subscribers, retain the ones it has, and meet ongoing demand. If it can do those three things in 2021 and into the future, it'll be a validation of the stock's success in 2020.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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