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Can This Fitness Company Double Its Revenue in 2021?

By Matthew Frankel, CFP® and Jason Hall - Updated Jun 22, 2021 at 3:23PM

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This fitness stock has been a big winner of the pandemic, but what happens now?

Peloton Interactive (PTON -2.16%) was a clear winner of 2020's stay-at-home economy. But will the company be able to maintain its sales growth in 2021 and beyond? In this Fool Live video clip, recorded on June 10, Fool.com contributor Jason Hall and chief growth officer Anand Chokkavelu discuss what could be in store for Peloton going forward.

Anand Chokkavelu: I think everyone should be able to guess what No. 1 is, it's Peloton. We haven't talked about it. Jason.

Jason Hall: Even though it was actually the No. 2 for all of us because we had very disparate rankings. But it was close. The difference between Lululemon and Peloton was pretty narrow and interesting too because I think there was some similarities. Peloton's best known for its spin bikes and maybe something management's not happy so many people know about is its treadmill that eats pets apparently. I don't mean to make light of it, but they've had some serious issues with that treadmill.

But people think of it as the hardware, but the better way to describe it, this is a connected digital fitness company. The most important metrics that you hear management talking about are things that you might hear from a social media platform, like members and things like that, and from a Cloud company like retention rate. It says a lot about really what the business is all about. Last quarter, the company reported $1.26 billion in revenue, so it's on track to be a $5 billion-plus revenue business. At the acceleration of revenue that we've seen, it could be a $10 billion business before we know it.

This is a really interesting thing they've talked about. The first six years of its business, the company has doubled revenue every year, which is incredible that they've been able to do that. The company said last year or last quarter ended with 5.4 million members and those members did almost 150 million workouts over that quarter. Over 90 days, 150 million workouts, so that means that people are engaged. Revenue retention rate of 92% over the past 12 months. It's really incredible when you think about what they're looking to do. They really focus on those member engagement numbers.

It's interesting because gyms rely on lots of people joining, but then rarely showing up to work out. That's how their economic models work. Peloton's business is entirely built on creating an engaging platform with users that regularly use it. Big things on Peloton's plate right now, building out more manufacturing, just recently announced the deal to build a plant, I think it's in Ohio, to bring some of that manufacturing closer to its most important market. Announced that it's acquiring Precor, which is maybe the biggest player in commercial gym equipment, and has to integrate Precor into the Peloton family. It has plans there to keep Precor's president as CEO of Precor, who will be reporting to a Peloton president. It's really important to see how effective they are with integrating that within Peloton and how they intend to use it.

This is a $31 billion valuation, so you think it's easy, you look at the trailing-12-month valuation and it might look higher than it really is. That's about six times sales based on last quarter, that $1.26 billion. So it still has to earn that. To earn it, it needs to continue to have strong growth in equipment sales, because that equipment sales leads to the recurring revenue from those engaged members. That recurring revenue is very profitable, very high-margin, and the big picture is for that recurring revenue eventually to become the largest source of its revenues tend to be larger than its hardware revenue. So really interesting business. The question is, are they going to be able to continue to grow that revenue every year by 100%?

Anand Chokkavelu, CFA owns shares of Lululemon Athletica and Peloton Interactive. Jason Hall has no position in any of the stocks mentioned. Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica and Peloton Interactive. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Peloton Interactive, Inc. Stock Quote
Peloton Interactive, Inc.
PTON
$12.66 (-2.16%) $0.28
Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
LULU
$333.42 (1.10%) $3.62

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