What happened

Shares of Peloton Interactive (NASDAQ:PTON) were trading up by 5.1% as of 11:57 a.m. EDT Monday after the company received a bullish initiation from a Wall Street analyst. Loop Capital kicked off its coverage of the connected fitness company with a buy rating, and its analyst, Daniel Adam, assigned a price target of $140 to Peloton stock.

So what

Adam believes that the market's concerns regarding Peloton's recent recall of its Tread and Tread+ products are overblown. The consumer discretionary company has a strong history of beating earnings expectations and boosting guidance. Peloton shares are down by approximately 40% from their January peak, in part due to negative sentiment related to the recalls.

Man riding a Peloton Bike at home

Image source: Peloton.

Investors aren't fully appreciating Peloton's pricing power, in Adam's view. The analyst suggests that the company could raise its subscription prices and drive incremental revenue growth from its existing user base. While Loop Capital does not believe that such a price increase is imminent, it suggests that "the opportunity to do so clearly exists."

"Currently, both our estimates and consensus only contemplate sales of existing Peloton [connected fitness] products (i.e., the Bike and Bike+, Tread and Tread+)," the analyst wrote in a research note to investors. "However, given the company's history of launching new products, innovation could drive upside to our numbers and the Street's."

Now what

Loop Capital is looking forward to seeing what else Peloton has up its sleeve, pointing to the company's R&D budget of over $200 million. As the company continues to grow its subscriber base, Adam is optimistic that it can also expand its margins.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.