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Near Year-to-Date Lows, Is Peloton Stock a Buy?

By Parkev Tatevosian, CFA – Aug 20, 2021 at 8:49AM

Key Points

  • Sales are still surging for Peloton.
  • Peloton acquired an exercise equipment manufacture to help boost supply.
  • Peloton stock is trading at a forward price to sales ratio of 6.3, an almost 50% drop from earlier in the year.

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The company has faced myriad challenges in 2021.

Popular interactive exercise equipment maker Peloton (PTON 0.30%) is having a rough go of it in 2021. The good news for shareholders is that some of its troubles have arisen because demand for its products is so high. For instance, at the pandemic onset, orders for its products surged to the point where customers were waiting almost 10 weeks for delivery.

Let's go through a few more of its challenges this year and determine if it did enough to solve them. The market doesn't think it has, which could be why the stock is down 25% in 2021.

A person exercising on a stationary bike inside a home.

Peloton stock is down nearly 25% in 2021. Image source: Getty Images.

Supply constraints 

Sales of Peloton products have been surging for years, and at the onset of the pandemic, when gyms closed, it got a further boost in orders. During normal times, it may not have been such a challenge to increase output to meet that demand -- but this is a pandemic, and it became difficult to ramp up production and ship products to customers. As a result, wait times reached as high as 10 weeks, and customer complaints about canceled orders and delayed shipments started coming in. 

To remedy the problem, management spent $100 million on expedited shipping to get products to customers promptly and make room for more production. And to help ensure it has sufficient supply to fuel its growth ambitions, management went out and made a $420 million acquisition of manufacturing company Precor.

Tread recall 

In March, the U.S. Consumer Safety Protection Commission informed Peloton (CPSC) it had to address safety issues regarding its Tread+ treadmill product. There were several reports of injuries, and Peloton eventually decided to recall the product. 

Although a complete resolution of the scenario has not yet been reached, Peloton CFO Jill Woodworth estimated the total damages to the company to be an estimated $165 million. In addition to financial damage, Peloton could experience damage to its reputation from this incident. Therefore, the company initially hesitated before issuing the recall and eventually apologized for its slow response. 

The bottom half of an exercise bike in use.

Image source: Getty Images.

Economic reopening 

There is no doubt Peloton experienced a boost in demand during the pandemic. There are an estimated 180 million members of fitness facilities worldwide. With gyms forced to shut their doors during lockdowns, folks who wanted to continue exercising had to find other outlets. Still, because of supply and logistical constraints, Peloton could not capture the full measure of this surge.

In the last four quarters, Peloton's revenue increased by 172%, 232%, 128%, and 141%, respectively, compared with the same quarter a year prior. However, revenue grew by 99% and 110% in fiscal 2018 and 2019, respectively. So while the pandemic did provide a boost, Peloton's products were already on fire.

Investor takeaway 

By forcing gyms to temporarily close their doors and making people cautious about being around others, the coronavirus pandemic provided a tailwind to Peloton. However, the pandemic also made it harder to meet the increase in customer requests. While management may not have handled each challenge perfectly, it did take steps to address them. 

The fall in the stock price has it trading at a forward price to sales ratio of 6.3, nearly half the level it was at to start the year. It appears that the stock may be oversold, which offers an attractive opportunity for long-term investors to start accumulating a position.

Parkev Tatevosian owns shares of Peloton Interactive. The Motley Fool owns shares of and recommends Peloton Interactive. The Motley Fool has a disclosure policy.

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