After observing the business for some time, including the mesmerizing rise and subsequent fall, I recently decided to purchase shares of Peloton Interactive (PTON 0.13%). I don't know yet if I'm making a big mistake or if this will prove to be a lucrative investment decision, but I think the potential reward far outweighs the inherent risk.
This once-surging consumer discretionary stock has fallen 75% over the past 12 months as investors have eschewed the pandemic winner. I understand the threat that brick-and-mortar gyms, as well as other connected-fitness rivals, pose to Peloton. I'm also fully aware of the problems facing the company today. Nonetheless, I am optimistic.
Here are the three major reasons I now own Peloton stock.
Image source: Getty Images.
Superior product
Nautilus (NLS +0.00%), which owns the Bowflex and Schwinn brands, has been around since 1986. Despite this long operating history, today it carries a market capitalization of just $129 million (compared to Peloton's $9 billion value). What's more, Nautilus generated sales of $147.3 million in the three-month period that ended Dec. 31, far less than the $1.1 billion in revenue Peloton registered during the same time.
How has a company that was founded in 2012 crushed the well-known and longstanding incumbent and become the dominant player in its industry in only a decade? It's by offering an incredibly superior user experience.
Peloton currently has 2.8 million connected-fitness subscribers (those who own a piece of equipment) who have access to thousands of workout classes conducted by world-class instructors at any time and place that they want. Mixing technology with fitness to develop hardware and software that users absolutely rave about like this has never been done before. It's why Peloton's 12-month retention rate and second-quarter average monthly member churn were an excellent 92% and 0.79%, respectively.
"We have a great product, high NPS, low churn, and are the category leader. And that's what really makes us excited about the future," CFO Jill Woodworth said on the Q2 2022 earnings call. Add to these favorable characteristics a powerful brand, and Peloton's chances of success are solid.
New leadership
What co-founder and previous CEO John Foley did is admirable. He was rejected by thousands of early investors but persevered and ultimately built Peloton into the multi-billion dollar business we see today. But his recent mistakes, with overestimating demand at the top of the list, cost him his job.
Enter new CEO Barry McCarthy, formerly the CFO at Spotify and Netflix. His financial background and familiarity with subscription-based business models give me confidence that he will focus on keeping costs in check while trying to find ways to bolster the recurring revenue stream.
He plans to utilize an experimental approach, testing new ideas and relying on data to inform decision-making. Introducing a bundled pricing structure in select markets is the first initiative to drum up demand and lower the barriers to entry for customers. Coming up with effective strategies to get more of Peloton's equipment into more households will be key.
McCarthy certainly has his work cut out for him, but I think he has the right plan of attack. A fresh perspective could be exactly what Peloton needs right now.
NASDAQ: PTON
Key Data Points
Extreme pessimism
The market tends to overreact to both positive and negative news, often sending a company's stock price far past a reasonable valuation. I believe this was the case with Peloton in 2020 to the upside, and I think it characterizes the stock today on the downside.
Peloton's current share price carries a price-to-sales ratio of 1.9, the lowest valuation that the company has ever had. To say that there's pessimism surrounding Peloton's stock would be a huge understatement.
Understandably, investors are concerned that Peloton was just a one-hit pandemic wonder whose future won't even remotely resemble the monster success of 2020. However, the best investment returns can sometimes be achieved when a business is priced as if it's doomed. If Peloton's new leadership can lean on its incredible brand to drive consumer demand and at the same time keep a tight lid on operating expenses, I believe the stock can be a big winner.
Expectations are extremely low, so any improvements in the years ahead should support a higher stock price.
