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2 Overlooked Catalysts for Peloton Stock in 2021

By John Ballard - Jan 17, 2021 at 8:10AM

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The Precor acquisition could boost demand for the company's products even further.

Peloton Interactive's (PTON 2.59%) recent agreement to acquire Precor, a leading manufacturer of fitness equipment, has been well received by investors for several reasons.

One is the potential to significantly expand the size of Peloton's addressable market to non-residential areas, such as hotels, but the deal will also benefit the company in two other important ways that investors might be overlooking in the near term.

A Peloton bike sitting in a living room.

Image source: Peloton Interactive.

1. Savings on delivery costs

Peloton stock is up nearly 500% over the last year, driven by accelerating demand for connected fitness products during the pandemic. The last earnings report showed an impressive 232% year-over-year increase in revenue that resulted in a substantial boost to Peloton's profit.  

For the fiscal second quarter (which ended in December), management is guiding for adjusted EBITDA margin to come in at 7%, a complete reversal from the year-ago quarter's margin of negative 6.1%. 

However, management's guidance represents a decline from the previous quarter's 15.7% adjusted EBITDA margin. The culprit is higher port congestion, related to higher e-commerce orders during the pandemic. This has slowed order delivery times, causing Peloton to spend more on shipping to offset some of the delays. 

Peloton operates manufacturing facilities in Taiwan to make its products, but the Precor deal will add a wide manufacturing footprint in the U.S., allowing Peloton to shorten delivery times for customers. 

Most importantly, Precor's domestic manufacturing base will help alleviate those extra shipping-related expenses that Peloton is dealing with at the ports. This issue goes beyond COVID-19; Peloton has also had to temporarily close warehouses in California due to fires. The additional 625,000 square feet of manufacturing capacity will provide Peloton much greater flexibility to work around these delivery obstacles. 

Faster delivery times should translate to better inventory turnover, leading to better performance for Peloton's bottom line.

2. Faster product cycles

The shipping problems have worsened for Peloton given that the launch of the new Bike+ and subsequent reduction in price of the original Bike caused demand to spike even higher in the last quarter. 

The new Bike+ model has been very popular so far with new and existing customers, with the addition of new features, such as a rotating screen for off-bike workouts. Peloton also now offers the new Tread+ model, giving customers two separate Tread models at different price points to choose from. 

Peloton seems to be using new product releases to drive down prices of previous models and increase demand for its products. This is consistent with management's stated goal to make its products as affordable as possible. 

The addition of Precor could play a big role in helping Peloton release new products faster and continue driving down prices of older models. The press release announcing the acquisition stated that "the Precor team plans to work with the Peloton R&D team to design and create the next generation of connected fitness experiences." 

We've seen how Peloton can drive incremental demand by adding new features to its Bike and Tread models. If the extra development resources from Precor allow Peloton to innovate at a faster clip and release new models on a regular schedule, all bets are off. 

The Precor deal is expected to close early in calendar 2021, so these benefits won't start to surface until later. In addition to alleviating the higher shipping costs, investors should watch for new product announcements over the next few years that could trigger more demand for these hot interactive fitness products.

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