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Peloton: Buy the Dip?

By Neil Patel - Apr 22, 2021 at 7:37AM

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Negative headlines around this fitness company have presented investors with a compelling opportunity.

After going public in Sept. 2019, Peloton Interactive (PTON -0.55%) has been an absolute darling on Wall Street. The stock skyrocketed over 400% from the initial public offering through the end of 2020, elevating it to large-cap status. 

However, it's been a completely different story the past few months. The stock price has fallen 33% year to date as of this writing, and investors are certainly wondering what's happening with the company.

Is this just a temporary speed bump or something more permanent as the world starts to open back up and people venture out again? The answer will determine whether or not investors should take a bite out of this high-growth stock. 

Men in suits taking apart down arrow and building green arrow

Image source: Getty Images.

First, what's going on? 

Peloton was a huge winner as the coronavirus pandemic started to take control of our daily lives last spring. With people stuck inside their homes, the connected-fitness company's products soared in popularity. 

From the fiscal 2020 third quarter (ended March 31, 2020) through the fiscal 2021 second quarter (ended Dec. 31, 2020), revenue more than doubled to $1.06 billion, while connected-fitness subscribers grew from 886,000 to 1.67 million. Quarterly workouts also jumped a whopping 122%. The business is firing on all cylinders, but challenges around handling the extended surge in demand became evident.

The stories are well documented of customers waiting weeks and even months for delivery of products, only to be notified last minute that the date had been pushed out even further. While such high demand is a problem any business would love to have, the unsatisfactory customer experience has been a real concern for Peloton and its brand.

On top of investor fears about how a reopened economy may affect Peloton's growth prospects, the Consumer Product Safety Commission (CPSC) has asked Peloton to recall its new Tread+. The regulatory agency cited 39 separate safety incidents, including one death, with the product and urged owners with children and pets to stop using the device.

These are no doubt serious problems Peloton must address, but I think the company's long-term prospects remain intact. 

This is a buying opportunity 

In order to address the supply chain and delivery headache, Peloton recently acquired Precor to tap into its production capabilities and to open up opportunities for Peloton in the commercial market. The added U.S. manufacturing footprint is something Peloton desperately needs as it tries to shorten fulfillment times.

Management also announced a $100 million investment to boost its shipping capabilities with the goal of getting back to the normal four-week order-to-delivery timeline by late spring.

Second, so-called human mobility is definitely set to increase as a greater number of people get vaccinated. With gyms already open as well, this places some pressure on Peloton's near-term prospects. Investors want to see continued strength in the business as consumers spend more time outside of their homes. 

For full-year fiscal 2021, management is forecasting $4.08 billion in revenue, a 39% gross margin, and 2.28 million connected-fitness subscribers. Based on these figures, the company is far from slowing down as it leads the at-home fitness trend, something that had legs even before the pandemic started.

And finally, the recall request from the CPSC should not be taken lightly. Focusing on safety is absolutely paramount for a premium brand like Peloton, but it's worth noting that it's unclear if the Tread+ is actually more dangerous than competing treadmills from other manufacturers. Peloton has called the regulator's warning "inaccurate and misleading," indicating there's no reason to stop using the Tread+.

With the stock's recent decline, I agree with the bullish view from analysts at Stifel and JPMorgan that investors should view this sell-off as a buying opportunity. Peloton has established an enviable track record since its IPO, and the company is likely to continue pedaling higher long term.

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Stocks Mentioned

Peloton Interactive, Inc. Stock Quote
Peloton Interactive, Inc.
$9.13 (-0.55%) $0.05
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
$113.05 (1.28%) $1.43
Stifel Financial Corp. Stock Quote
Stifel Financial Corp.
$56.00 (-0.04%) $0.02

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