Peloton Interactive (PTON -1.77%) makes exercise bikes and treadmills whereas Netflix (NFLX -0.15%) is a streaming-video subscription service that produces much of its own content. At first glance, these two companies couldn't be more different. However, Peloton also has a video subscription service, and it breaks these numbers out for investors. Therefore, an apples-to-apples comparison is possible.
This might sound like a silly exercise (ahem) but stick with me -- there are good reasons to compare Peloton stock to Netflix stock. First, Peloton stock is down more than 80% from its high, and investors wonder if it's cheap. By comparing it to Netflix, I think you'll agree that it's a good value. However, Peloton stock isn't necessarily a buy just because it's cheap -- it's cheap for a reason and this comparison with Netflix will drive the point home.
What's a subscription streaming service worth?
Despite the proliferation of streaming-TV content, there are few pure-play streaming stocks out there. Netflix is the giant in the space. CuriosityStream (NASDAQ: CURI) specializes in educational content. And fuboTV (NYSE: FUBO) is a sports-centric service. However, fuboTV generates some of its revenue from advertising, not just subscription fees, so keep that in mind. But the following chart shows how these three streaming stocks compare in key metrics.
|Company||*TTM revenue||Revenue growth rate||Gross margin||**P/S ratio|
As the chart shows, fuboTV has a cheaper P/S valuation than Netflix and CuriosityStream despite its higher growth rate. This is likely because of its gross profit margin. FuboTV's subscriber-related expenses along with broadcasting and transmission expenses cost more than what it generates in subscription fees. The company hopes to grow its advertising and sports betting businesses in time to offset this poor profitability. But for now, fuboTV is a money-losing business and hence has a low valuation.
Moving to the other two companies, it's tempting to either call CuriosityStream stock cheap or call Netflix stock expensive. Netflix has lower margins and a lower growth rate but has a higher valuation compared to CuriosityStream. However, no matter which way you look at it, it's fair to say investors reward higher margins with richer valuations.
Which brings us to Peloton. Here are the numbers for just its subscription business -- all hardware numbers are excluded.
|Company||TTM revenue||Revenue growth rate||Gross margin||P/S ratio|
|Peloton's subscription business||$1.02 billion||125%||64%||7.8|
Again, this chart imagines that Peloton was just a subscription video service. But the stock currently trades at just under eight times the trailing revenue of this one segment of the business.
Given its superior growth rate and margins, Peloton's subscription business looks reasonably valued in comparison to Netflix.
Why is Peloton stock so cheap?
Of course, Peloton is not just a subscription business. In the first quarter of fiscal 2022 (the most recently reported quarter), 62% of total revenue came from hardware products: its exercise bikes and treadmills. And hardware profits are rapidly eroding. The Q1 hardware gross margin was just 12%, down from 39% in the same quarter last year.
Moreover, Peloton management is spending like crazy, anticipating a surge in hardware demand. Consider it spent $87 million in Q1 alone on property and equipment to build out manufacturing capabilities. During the quarter, it also spent $332 million in inventory. And sales-and-marketing expenses soared 148% year over year to $284 million.
However, the anticipated demand for hardware hasn't been there. Hardware revenue fell 17% year over year in Q1. In the conference call to discuss results, CFO Jill Woodworth said, "It is clear that we underestimated the reopening impact on our company" and also, "overall traffic has not met our initial expectations." Interpretation: We spared no expense preparing for consumer demand that didn't materialize. Ouch.
A recurring-revenue subscription business is easier to manage than a lumpy hardware business. If Peloton was just the former, the stock would look like a smart bargain buy today.
But Peloton is also a lumpy hardware business. This is in stark contrast to pure subscription businesses. Revenue visibility is much clearer for companies like Netflix and CuriosityStream. Expenses, therefore, are easier to manage. If you're buying Peloton stock today, you're assuming management can effectively forecast hardware demand and spend accordingly.
While it may be tempting to simply hope Peloton management can turn things around, you might want to wait to hear from management when it reports second-quarter financial results on Feb. 8 before making any decisions. Even though the stock might look cheap, I wouldn't buy more until management does more to win back investors' confidence.