Sales are surging for Peloton Interactive (PTON 3.05%) as exercising at home is becoming more popular. Gym closures following the pandemic's onset only put fuel on a fire that was already white-hot. That isn't to say the company is clear of any challenges. And there is no telling, for certain, how consumers will behave in the aftermath of the pandemic.
Will they return to their accustomed habits from before the pandemic? Or will they stick with new habits formed when so many businesses were closed? Most likely, it will be a blending of both worlds. Regardless of the scenario, Peloton has a good chance to thrive. Here are three reasons to buy Peloton stock.
1. Six years of 100% revenue growth
Peloton has grown its revenue by over 100% for six years in a row now. What's more, management is guiding for a seventh consecutive year of three-digit revenue growth in 2021. Despite the price premium commanded by its exercise equipment, customer orders continue to climb.
Gyms are reopening across the U.S. Those that haven't opened yet have plans to do so as states are ease business closures. The reality, however, is that fitness enthusiasts are loving the product. That should assuage investors who may be thinking that Peleton is quintessentially a stay-at-home stock, and that sales could suffer as the economy reopens.
The torrid pace of growth has put it in striking distance of reporting its first-ever year of positive net income. In the first six months of fiscal 2021, the company has net earnings of $132.8 million versus losses of $105.2 million at the same point last year.
2. Solving its biggest problem
For most of 2020 and thus far in 2021, its biggest problem has been fulfilling customers' surging demand. Wait times for its products reached almost three months at one point. To make matters worse, delivery dates given to customers on initial orders were being delayed further. It got bad enough that folks started complaining and, even worse, canceling orders.
The good news for investors is management acknowledged the problem and did something about it. "We are investing over $100 million and [using] expedited shipping to reduce the wait times for our products," CEO John Foley explained in Peloton's second-quarter conference call on Feb. 5. "This expense will include air shipments, expedited ocean freight, and incremental cost to get containers to other ports that are less congested."
Meanwhile, it has made several acquisitions to solve this problem for good. Recently, it closed on a previously announced $420 million deal for Precor, a manufacturer and distributor of exercise equipment. Importantly, Precor has facilities in the U.S., which will significantly help Peloton deliver products domestically. The acquisition helps increase capacity, reduce shipping expenses, and get products to customers faster. In 2019, it acquired another manufacturing company (Tonic Fitness) based in Taiwan for $45 million.
These developments seem to be working in Peloton's favor as order wait times are now down to more normal levels of one to three weeks.
3. Disrupting the habit of going to the gym
One of Peloton's long-run goals is to disrupt gyms the way Amazon has disrupted retail. That's a huge market opportunity. At the end of 2019, before pandemic-related disruptions, there were 64 million individuals with a gym membership in the U.S. alone. To put that figure in context, as of Dec. 31, Peloton had 1.67 million Connected Fitness subscribers. It is only scratching the surface of the total addressable market, which is a good time for investors to get on board.
Still, risks remain in investing in such a high-growth company. For one, valuation is not cheap. The company is trading at a forward price-to-sales ratio of 8.5, but below its peak of 12 reached earlier in the year. The stock is down over 22% year to date and has upside for long-term investors looking for a high-risk, high-return opportunity.