After closing at an all-time high of $167.42 two months ago, Peloton Interactive (PTON +6.08%) stock has since plummeted nearly 40%. The gradual reopening of the economy is weighing heavily on investors' minds, and rightfully so.
But Peloton was growing like wildfire before lockdowns and social distancing became the norm, hinting at what the future could look like for the company as people spend less time in their homes and venture back out to eat, socialize, and exercise. The outlook for Peloton is certainly not without its challenges, however, so let's find out if the stock is indeed a bargain following the significant decline in its share price.
What's going on here?
A true Wall Street darling, Peloton stock flew out of the gate after its IPO. Its market capitalization surged from $7 billion in Sept. 2019 to a whopping $49 billion in Jan. 2021. That's quite an impressive run, but increased vaccination rollouts are on their way to bringing about a return to "normal" lifestyles.
Image source: Peloton.
There were also some issues already brewing for the company last year. Amidst its first billion-dollar sales quarter (in the three months ended Dec. 31, 2020), the surge in demand for Peloton's fitness products resulted in unanticipated supply-chain issues. Delayed delivery times for bikes and treadmills generated numerous complaints among customers and forced the company to significantly increase the size of its customer service team to handle the backlash.
This obviously hurt customers' perception of the brand, especially given the fact these customers already paid for their equipment, and many expected exceptional, fast service for a purchase worth thousands of dollars.
Peloton is addressing this issue, though, with the $420 million acquisition of Precor. This deal will bolster its manufacturing capabilities in the U.S. and give Peloton an entry into the commercial market with the potential to provide exercise equipment to hotel chains, college campuses, and apartment buildings. A $100 million investment in expedited shipping should also help.
Because competition in the at-home fitness industry is heating up, the company needs to quickly remedy these customer service issues. Rivals such as Hydrow, Tonal, Nautilus, and Mirror provide plenty of premium options for home workout junkies.
Focus on the positive
But even with the pandemic's end in sight, there's still a lot to like about this fast-growing business.
Revenue growth was booming even before COVID-19. Peloton's top line more than quadrupled from fiscal 2017 to fiscal 2019, and management believes the momentum they enjoyed over the past year will push them forward in 2021 too. The company is guiding for just under $4.1 billion of sales in fiscal 2021 (ending June 2021). Peloton has already revised that figure upward twice, giving it another year of triple-digit growth.
The products are no doubt a massive hit with people seeking a convenient, fun, and effective way to exercise at home, and engagement continues to trend higher. In the fiscal 2021 second quarter, average monthly workouts per subscriber came out to 21.1, up from 12.6 in the year-ago period. Additionally, the 12-month net retention rate remained at a healthy 92%, and Connected Fitness member churn was just 0.76%, exemplifying low customer turnover.
Peloton will also get a boost from two new developments.
First, sales of the Tread will start in late May in the U.S. The lower-cost treadmill product has exceeded expectations in the U.K. where it was first launched last December. Second, Peloton just announced that it is expanding into Australia later this year. This is the company's first push into the Asia-Pacific region, a huge market that can drive the next phase of the company's growth.
Keep pedaling
All companies face problems, and Peloton's latest growing pains are no exception. Smart investors are those who can differentiate between temporary setbacks and long-term issues. Peloton certainly has some headwinds to deal with as it works to improve its delivery times and customer service in the face of growing competition.
But the company has also set itself apart as the clear industry leader with recent results that point to its staying power, even in a world without social distancing. Therefore, investors should view the recent sell-off as a buying opportunity -- Peloton stock will pedal higher over time.
