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Is Peloton Interactive Stock a Buy This Month?

By Rich Duprey – Dec 16, 2021 at 8:20AM

Key Points

  • Peloton admits it misjudged demand and is still seen as a luxury product.
  • Growth is still rapidly decelerating as the reopened economy gives consumers new outlets for exercise.
  • The stock has lost three-quarters of its value since the beginning of the year.

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Doubts still persist about whether the maker of connected fitness equipment has fallen far enough.

If a television-show character dying after using a Peloton Interactive (PTON 7.29%) exercise bike can really cause the connected fitness leader's stock to fall, then the markets are completely lacking in seriousness. Selling or buying shares over a fictitious event is silly, and might be another sign we're in the very late stages of this bull market run.

Peloton, though, has a lot of other concerns that have been weighing on its shares, which have now lost three-quarters of their value in 2021. 

A reopened economy, more competitors, a perception of being a luxury product at a time of tightening wallets, and lower use by existing customers are just some of the problems facing the maker of connected fitness equipment. None should necessarily be fatal, though, so let's see if Peloton's depressed stock is a buy this month.

Man running on connected treadmill

Image source: Getty Images.

Lack of engagement

The biggest change hitting Peloton is the ability of people to exercise outside the home again, whether outdoors or in gyms. Lockdowns kept people inside, so home fitness equipment was a logical option, and Peloton's sales soared.

Where fiscal first-quarter revenue more than tripled last year, it was only up 6% in the current period. While showing growth on top of those remarkable year-ago gains is a testament to the demand that still exists for Peloton products, the rapid deceleration is worrisome.

At the same time, engagement on the platform also fell, with workouts per subscription coming in at 16.6, down 16% from the 19.9 recorded in Peloton's fiscal fourth quarter and off 20% from the 20.7 seen in the same period last year.

Chief financial officer Jill Woodworth admitted the fitness equipment maker misjudged the market, telling analysts, "It is clear that we underestimated the reopening impact on our company and the overall industry."

That's forcing Peloton to cut prices. It announced the price on its entry-level bike would be slashed by more than 20% because "there remains a lingering perception that Peloton is a luxury item." 

A narrow market with many players

Yet there are also more rivals now targeting the same space. Nautilus (NLS 1.51%) recently reported its own earnings that saw sales rise 20% above last year, and 167% over the level hit two years ago, pre-pandemic. And Lululemon Athletica (LULU 1.70%), best known for its yoga pants, got into the equipment market with the connected Mirror.

Yet they're all seeing the same impact on their business from the reopened economy as Peloton is. Lululemon has dramatically halved the revenue growth it predicted for its Mirror segment earlier this year.

iFIT Health & Fitness had also planned a Nasdaq public listing under the ticker symbol IFIT at price ranging between $18 and $21 per share, but it pulled the debut because of market uncertainty and will reevaluate whether to go public at some time in the future. 

Woman on connected exercise bike

Image source: Getty Images.

A long-term play?

While Peloton's stock has taken a major haircut and currently trades at around $38 a share, it's not such a bargain. It might not be as overvalued as it was at the start of the year, but trading at 3 times sales when your business is decelerating is not enough of a discount.

Wall Street, though, still expects revenue to more than double by 2026 to $9.7 billion, when it will swing to meaningful profits of $1.31 per share. It should be producing over $1.3 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) by then, too. That could be why Wall Street has a consensus price target of $101 per share, suggesting more than 150% upside.

I don't see Peloton's business as being quite so compelling. Supply chain issues, pricing, competition, and other issues mean the connected fitness guru has too bumpy a road ahead to warrant putting more than a little money for the speculative portion of my portfolio into Peloton shares.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns and recommends Lululemon Athletica and Peloton Interactive. The Motley Fool has a disclosure policy.

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