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Is Peloton Stock a Buy?

By Bradley Freeman - Jan 5, 2021 at 9:53AM

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Why this year will be so important for the fitness company.

Peloton Interactive ( PTON -3.98% ) had a year to remember. Stay-at-home orders brought on by COVID-19 and the resulting brick-and-mortar gym closures both paved the way for a truly enviable performance in 2020 as the stock gained over 400%.

Can Peloton maintain this powerful momentum going forward and continue delivering strong shareholder returns long term? Let's dig in.

A financial performance for the ages

A row of exercise bikes

Image source: Getty Images.

In Peloton's fiscal 2021 first quarter -- the three-month period ended Sept. 30 -- its revenue spiked 232% year over year to $757.9 million. The rest of its results are just as impressive. Total connected fitness subscriptions more than doubled to 1.33 million, subscription gross margin expanded 240 basis points, adjusted EBITDA margin inflected from a 9.2% loss to a 15.7% profit, and net income turned positive for the first time in the company's history.

That outperformance prompted the company to raise every single fiscal 2021 guidance metric with the latest expectations for total revenue, adjusted EBITDA, and connected fitness subscribers coming out to at least $3.9 billion, $300 million, and 2.17 million, respectively. While this bullish forecast is not guaranteed, continued long shipping delays on new Peloton orders hint at some durability behind the company's recent growth.

Gauging Peloton's competitive environment

Peloton's extraordinary success will invariably attract new entrants into the space, and it already has. Competitors like Nautilus, NordicTrack, and others have all debuted their own connected cardio products, but Peloton appears unfazed.

As of this writing, Peloton enjoys over four times the volume of Google searches over its next closest direct competitor. No alternative comes close to approaching this level of consumer interest and buzz, and Peloton's demonstration videos fetch far more views than the competition on YouTube as well.  

Even if the competition is able to chip away at the company's leadership position, projected medium-term annual growth of over 30% for the connected fitness category is a reminder that there's room here for multiple winners.

So what about the threat posed by traditional brick-and-mortar gyms?

Over the last several weeks, COVID-19 vaccines from Moderna, AstraZeneca, and Pfizer have received regulatory approval and entered the distribution phase. While administering the vaccine to millions of people will take months, the effort is underway and should be taken into account by long-term Peloton investors.

Society will slowly begin to return to normal, and for Peloton specifically, it will have to compete with physical gym memberships once more. This is not to say its growth will halt. Peloton found success even before COVID-19, and its gains in 2020 have only solidified the allure and reach of its platform.

And luckily for Peloton investors, the company is now in a much stronger position to generate revenue from gyms reopening, thanks to its acquisition of Precor. Precor both designs and manufactures fitness equipment for commercial use. It has contracts with rock-solid businesses like Planet Fitness and many more customers such as hotels.

Even if the pandemic's end slows some of Peloton's at-home momentum, Precor offers a promising new avenue for the company to expand both existing and new revenue streams.

Watch closely in 2021

Yes, Peloton benefited from short-term tailwinds, but even as a former skeptic, it's undeniable that the company's execution last year has laid the foundation for continued growth. Market expectations are very high, and the next few quarters will be vital to gauging just how much Peloton can hold onto its momentum from 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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Stocks Mentioned

Peloton Interactive, Inc. Stock Quote
Peloton Interactive, Inc.
PTON
$42.25 (-3.98%) $-1.75
Pfizer Inc. Stock Quote
Pfizer Inc.
PFE
$54.68 (1.77%) $0.95
Nautilus, Inc. Stock Quote
Nautilus, Inc.
NLS
$6.47 (-5.55%) $0.38
AstraZeneca PLC Stock Quote
AstraZeneca PLC
AZN
$8,314.00 (0.46%) $38.00
Planet Fitness, Inc. Stock Quote
Planet Fitness, Inc.
PLNT
$78.71 (-3.65%) $-2.98
Moderna, Inc. Stock Quote
Moderna, Inc.
MRNA
$310.61 (-11.87%) $-41.82

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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