Peloton (PTON 5.02%) stock was a huge winner during the COVID-19 lockdowns over the past year. It was up more than 250% at one point in the last 12 months, and investors bet heavily on the success of the at-home fitness and lifestyle brand.

However, over the past few months, a combination of bad news for the business and investor favor turning away from pandemic market leaders has pushed Peloton stock down 40% from its year-to-date high. With shares at a relative discount, is now the time to buy Peloton stock? Let's take a look.

Person riding on a stationary bike at home.

Image source: Getty Images.

What happened

There likely isn't just one reason why investors soured on Peloton, but the recent sell-off correlates nicely with the COVID-19 vaccine rollout in the United States. This indicates that on the whole, many investors believe Peloton enjoyed only a temporary boost from the pandemic, one that is coming to an end as the economy reopens. As a result, its revenue growth will take a hit in the near future.

Along with this sentiment change, Peloton announced on its latest earnings call that it was launching a voluntary recall of the Tread and Tread+ (its premium treadmill offerings) after a child was killed using the equipment. This news sounded bad and sent the stock down close to $80 per share, or down 45% year to date. However, these treadmills are only a small part of Peloton's business, and the recall should have a limited effect on its financials. Management estimates that it will see a $165 million hit to revenue from the recall. For reference, the company generated $3.69 billion of revenue over the last 12 months.

The business is doing fine

The bearish narrative is that Peloton's business is reliant on the COVID-19 pandemic and stay-at-home mandates in order to grow. But when looking at the company's track record, the business has done fine with a fully opened economy, brutal lockdowns, and anywhere in between. For example, sales consistently grew at around 100% annually in the years prior to 2020.

Getting to more recent numbers, in the fiscal third quarter (which ended March 31), revenue was up 141% year over year to $1.26 billion. Management is guiding for revenue of $915 million in the current quarter, which would represent 50% growth from the prior-year period. Guidance was lower than the average analyst estimate, but as long-term investors, we know that missing one-quarter of forecasts from Wall Street does not make or break a business.

Peloton is also seeing tremendous growth from the higher-margin areas of its operation. In the latest quarter, Total Connected Fitness subscriptions grew 135% to 2.08 million, and paid digital subscriptions grew a whopping 404% to 891,000. Investors in Peloton should closely track the growth in paid subscriptions as they bring a higher margin and more consistent revenue stream to the business.

For example, hardware gross margin was only 28.4% (it is typically slightly higher but suffered due to supply chain constraints) in the fiscal third quarter, while subscription gross margin was 64.6% with gross profit growing 172% to $154.5 million. Since fitness hardware typically only needs to be purchased once, over time, more and more of Peloton's profits will come from its subscriptions.

An interesting new acquisition

In April, Peloton closed on its acquisition of legacy fitness equipment company Precor for $420 million in cash. Fellow Fool John Quast pointed out two reasons why Peloton decided to team up with Precor. 

First, the purchase will give Peloton an immediate manufacturing boost. With years of experience and established facilities in the U.S., Precor can help Peloton solve some of the supply chain issues that have recently plagued the business. Management also announced it will invest $400 million to build a manufacturing plant in Ohio that will fulfill all of Peloton's North America demand by 2023. With the addition of Precor and this new manufacturing investment, Peloton is setting itself up to have a more resilient supply chain.

The other benefit of the Precor acquisition is that it gives Peloton a major inroad into more communal settings like hotels and apartments where Precor already has a major presence. This will help increase the value proposition for existing members by letting them access Peloton workouts while not at home and also serves as a customer acquisition tool for non-Peloton users who can try the product.

The stock is still not cheap

Even though shares are down over 30% year to date, Peloton stock is not cheap. Its market cap sits at about $31 billion as of this writing, and with about $4 billion in annual sales (assuming the company hits its latest guidance for the fourth quarter), the stock has a price-to-sales (P/S) ratio of 7.8. This may seem cheap relative to some tech stocks, but investors should remember that the company does not have a proven track record of profitability, and the low gross margin of its hardware business may inhibit its long-term net profit and free-cash-flow margins.

With that being said, if you believe Peloton can continue growing digital subscribers at a rapid rate over the next few years, a market cap of $31 billion may look cheap five or 10 years down the line. Peloton doesn't look like a screaming buy here, but investor's shouldn't sell just because of the recent declines.