Before buying or selling a stock, it's worthwhile to do your own research in order to have the knowledge necessary to make an informed decision. Taking the time to figure out exactly why you believe a company might be a lucrative investment, or why it could be a poor addition to your portfolio, will ultimately make you a better investor.
And in this market, there are few companies drawing more polarized reactions right now than Peloton (PTON +9.46%). The fitness stock dazzled investors last year as lockdown orders drove people to its exercise equipment in order stay in shape at home, but industry conditions are no longer so one-sided.
Let's dissect the bull and bear investment cases for Peloton.
Image source: Getty Images.
What the bears say
Coming up with a convincing bear case is not a very difficult task right now, and there are three important reasons Peloton could be a poor investment.
For starters, the last two quarters have shown falling user engagement. In the fiscal 2022 first quarter, connected-fitness subscribers worked out an average of 16.6 times per month, bringing the metric down closer to pre-pandemic levels. At the end of fiscal 2021, Peloton saw average workouts decline sequentially from 26.0 to 19.9. Whether this trend stems from the economic reopening -- and people thus spending less time at home -- or other factors, declining engagement is a concern.
Then, there's the fact the at-home fitness market is only growing more crowded. Peloton has to fend off direct rivals like Hydrow, Tonal, and Mirror with their own versions of premium, interactive exercise equipment. Meanwhile, traditional brick-and-mortar gyms are recovering from their pandemic lows as Planet Fitness' latest quarterly results showed. The low-cost gym operator just recorded its highest sequential third-quarter net member growth in its history.
Finally, the at-home fitness niche may be slowing overall. Peloton's management team cut revenue guidance for full-year fiscal 2022 from $5.4 billion to $4.6 billion (at the midpoint) with its latest earnings report. Lululemon also halved its revenue outlook for Mirror in the current fiscal year to approximately $125 million, with CEO Calvin McDonald noting during the earnings call, "As you know, 2021 has been a challenging year for digital fitness."
The competitive, ever-changing nature of the fitness industry has naysayers convinced Peloton's spark is fading fast.
What the bulls say
On the other hand, Peloton's market capitalization is $14 billion as of this writing. It's hard to believe that less than 12 months ago, the company was ready to eclipse the $50 billion milestone. Peloton currently trades at just 14 times its trailing-12-month subscription revenue of $1 billion. This segment grew 94% year over year in the fiscal first quarter, and it boasted a 67% gross margin, making the multiple especially attractive for a fast-growing software subscription business. And that doesn't even include the hardware segment. Value investors might view this as a lucrative buying opportunity.
Management set a long-term goal of reaching 100 million members one day, but Peloton, which ended September with 6.2 million members, doesn't need to achieve this ambitious goal to be a winning investment. Its innovative equipment remains best-in-class, and in addition to the U.S., there's room for the company to expand in Canada, the U.K., Germany, Australia, and other international markets.
And lastly, Peloton has a lot of optionality in its business model to fuel growth. Not only can it introduce new products like the Guide, but it can also find other avenues in its recently launched apparel business, wearable devices, and even new distribution channels (like corporate customers thanks to the Precor acquisition). The founder-led management team still has plenty of time to showcase how it can execute these new opportunities.
At today's depressed price, you don't need lofty expectations to believe the stock could outperform.
Data by YCharts.
Think for yourself
While it's clear Peloton stock flew too high, too fast in the initial phases of the pandemic, many of the elements of this business that initially won over so many investors still remain. The company faces significant hurdles going forward, but it does so from a strong position.
So I urge you to think independently and come to your own conclusion about the business -- both cases are compelling.
