Peloton Interactive (PTON 4.29%) stock debuted in late September 2019 at about $29 a share and didn't get the big price bump many other tech stocks were getting in their IPOs that year. The company was growing well, but it was spending a lot of money for that growth and investors were a bit concerned if there was enough market for its products.
Then along came the coronavirus pandemic roughly six months later, and all of a sudden, Peloton's stock value became much more apparent. Over the year that followed, Peloton stock became one of the big pandemic success stories. Fitness enthusiasts turned to the company to provide them with workout options while gyms were closed, and sales skyrocketed along with the stock price.
But if the company wasn't very profitable before the pandemic started, should investors be concerned that it will return to its net-loss financials as the pandemic wanes? Let's take a look.
Image source: Peloton Interactive.
Strong sales during lockdown
Peloton manufactures connected fitness equipment and sells subscriptions to live-stream and on-demand workout videos for users of its products. Its video monitor-equipped stationary bicycles and treadmills sell at a hefty price -- nearly $2,000 for the cheapest model. The expense seems to have become easier to justify under lockdown, and year-over-year sales growth, which had been tapering off in fiscal 2020 Q2 (ended Dec. 31, 2019) and fiscal 2020 Q3 (ended March 31, 2020), came back with a vengeance in the pandemic-influenced quarters that followed.
| Metric | Q2 2020 | Q3 2020 | Q4 2020 | Q1 2021 | Q2 2021 |
|---|---|---|---|---|---|
| Sales growth (YOY) | 77% | 66% | 172% | 232% | 128% |
Data source: Peloton Interactive quarterly reports. YOY = year over year.
That interest seems to be carrying over into 2021. The company expects 110% sales growth in fiscal 2021 Q3, keeping growth rates in triple-digit percentages for a fourth straight quarter. Peloton has also posted positive earnings and net profit for the past three quarters.
In the fiscal 2021 second quarter (ending Dec. 31, 2020), the retention rate on user subscriptions was 92%. Even as economies are beginning to open up, customers appear to be sticking with their Peloton subscriptions.
Why is Peloton's stock price down?
Peloton's strong sales were a blessing and a problem for the company as 2020 ended and 2021 began. Strong demand created supply issues that relegated customers to a months-long waiting list and generated some negative publicity. As the company worked to resolve its supply issues, some analysts were disagreeing about the company's stock price target. That created some stock price volatility in 2021.
Peloton stock hit an all-time high of $171.09 a share in mid-January. That was after trading as low as $17.70 in mid-March 2000 (an 867% price swing).
But the current Peloton share price is down about 30% from its record high in mid-January and down about 21.8% year to date, the victim of a broader tech stock sell-off that occurred this spring. The price drop comes despite strong sales continuing in Q3 2021. It could also reflect the fact that Peloton stock still trades at a multiple of 237 times trailing-12-month earnings. That sounds astronomical, but it's actually much lower than it's been for the past year thanks to increased earnings and the share price drop.
So many opportunities for Peloton
As vaccines get rolled out and more people begin to interact again outside the home, some investors are wondering if Peloton can sustain the growth it saw in 2020. I think it can.
Remote work trends appear to be popular and aren't likely to reverse all the way to how they were before the pandemic. For example, JPMorgan Chase's CEO Jamie Dimon said last week in his annual letter to shareholders that his company is expecting smaller offices going forward and it may only need 60 office seats for every 100 employees because of the move toward remote working. Such a trend works in Peloton's favor.
Peloton has also announced a string of initiatives over the past 12 months that will solidify its dominant position and ensure future growth. It rolled out several new products at different price points to expand its product line and reach more customers. It is acquiring commercial fitness equipment company Precor, which it will likely use to improve and expand its manufacturing capacity and further reduce wait times on shipping products to customers. In fact, Peloton is confident enough that it has resolved its product capacity and resolved shipping delays that it opened a new international market, launching sales and service to Australia. It will very likely announce further international market expansion in the coming year.
Winners keep on winning, and you don't have to wait for a lower stock price to invest in a company that still has huge potential. Stock price volatility is just part of the cost of getting in on a growth stock that is relatively early in its development as a public company. When price dips come along -- and they will -- it's an opportunity to dollar-cost-average your share investment.
If you're considering buying Peloton stock -- and there are many reasons to do so -- now is probably a good time.
