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Will Peloton Interactive Keep Winning in 2021?

By Anders Bylund - Jan 1, 2021 at 8:27AM

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The exercise equipment expert is guaranteed to deliver explosive sales growth, but is the stock a good buy at these sky-high prices?

Exercise equipment maker Peloton Interactive ( PTON -4.25% ) crushed it in 2020. The stock rose 432%, driven by fantastic earnings reports in September and November. The company's treadmills and stationary bikes with large screens for entertainment or instruction videos hit a nerve during the coronavirus lockdowns. Will the at-home workout craze have legs in 2021 and beyond, or is Peloton headed for slower growth at this point?

Signs of a long-lasting market trend

I would call Peloton a fad if the demand for media-ready exercise equipment had died out after a couple of months. That's not what's happening here. Peloton is still selling gear faster than it can make it, leaving customers waiting between 6 to 10 weeks for delivery.

That's a nice problem to have, but Peloton's management would prefer to fill orders within a couple of weeks and keep the revenue stream flowing. The company is about to open a new factory in China that should be able to finish 1.5 million bikes or treadmills per year.

The ambition doesn't stop there as management already plans to expand its manufacturing options even further. Strategic acquisitions can help Peloton meet its production goals, which explains why the company is buying fitness manufacturer Precor in a $420 million deal.

Meanwhile, Peloton's customers are shrugging off their late order deliveries to focus on a superior exercise experience, giving the company lots of valuable word-of-mouth marketing. Peloton also makes it easy to get excited about working out thanks to a social network that lets you compete against your friends.

A mother and child work out in their home gym, following a yoga instructor on the treadmill's screen.

The Peloton Tread+ is fun for the whole family. Image source: Peloton.

The definition of a hypergrowth stock

Peloton is not a cheap stock these days, trading at 1,290 times trailing earnings and 78 times free cash flows. That's not a deal breaker for growth investors, because Peloton is reporting stellar top-line growth. In the first quarter of fiscal year 2021, revenue more than tripled to $758 million as the number of paying fitness subscribers jumped 137% to 1.33 million.

The company has only started to nibble on a global fitness market with roughly $100 billion in annual sales, mostly tied to health club memberships. Peloton is leading a larger trend toward exercising at home. According to a recent report by market analyst Valuates Reports, the online fitness market alone could be worth $59 billion in 2027.

This is classic hypergrowth stuff where the company is expanding its user base as quickly as possible while the iron is hot. Profits will have to wait for a while, but when they come, they will be based on a huge list of global Peloton subscribers.

Is Peloton poised to win again in 2021?

I see no reason why the company should run out of rocket fuel in 2021. Revenue will continue to surge as the subscriber network keeps expanding, supplemented by healthy hardware sales.

Mind you, I'm not entirely convinced that the company should be worth $44.6 billion already, so I'm content to watch this stock from the sidelines until the business story changes or the stock price comes back to earth. Peloton's valuation is just too rich for my blood at the moment, and I say that as a lifelong growth investor.

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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