In order to get better and learn new lessons, it's a good idea for investors to study history. These insights can be applied to new investment opportunities you might be looking at.
Perhaps no business has presented a more informative case study than Peloton Interactive (PTON 9.43%) in recent times. The fitness industry innovator was on an impressive growth trajectory before the pandemic, a trend that was supercharged when people were stuck in their homes during the health crisis.
That rise was spectacular. But Peloton's fall from grace, as evidenced by the share price that's 98% below its peak, is even more unbelievable. Despite the company's ongoing struggles, I'm sure there are still fervent Peloton bulls who hope better days are coming.
With that being said, can this beaten-down stock become a trillion-dollar company by 2050? Here's what you need to know.
Getting back into shape, and then some
As of this writing, Peloton sports a market capitalization of $1.2 billion. If the company reaches a valuation of $1 trillion by 2050, it implies a monster 833-fold gain, which translates to a 30% annualized increase. Before you immediately roll your eyes, I think it's worthwhile to figure out what Peloton would need to do to achieve this milestone.
For starters, the core business needs to not only get back on solid footing, but growth needs to pick up. Selling significantly more exercise bikes and treadmills will be key, but sales of equipment were down year over year in the last three months of 2023. Getting more people to sign up for Peloton's digital app membership is also important.
Moreover, Peloton must start to produce positive earnings and free cash flow. The business has failed to post net income in any fiscal year. Getting to this milestone is the management team's priority.
When Peloton was on top of the world, growing revenue north of 100%, its market cap peaked at close to $50 billion in January 2021. Shares traded at a price-to-sales multiple of more than 20 around that time, too. If the core business can get back to producing the kinds of financial results it did back then, it would be an encouraging development, but I'm not sure if the market cap will exceed that previous peak of $50 billion.
This means that for the company to get to a $1 trillion valuation, it needs to find ways of significantly expanding its total addressable market. Maybe Peloton will start designing, manufacturing, and selling fitness wearables, like the Apple Watch, Whoop, or Oura ring. Or maybe it will open up a chain of fitness studios across the country and internationally.
These are at least related to the company's exercise equipment offerings. And they can cater to a bigger audience.
Be realistic about Peloton
To really move the needle, though, Peloton would need to get into completely different industries that possess much greater expansion potential. I can think of health insurance because it goes with the health and fitness focus. Streaming entertainment is another one that comes to mind, given that Peloton shows live and recorded classes and because music is such a big part of the experience.
But even the leaders in the health insurance and streaming industries aren't close to a $1-trillion market cap. And if Peloton somehow decides to enter these markets, the chances of success are slimmer than zero.
To believe Peloton can reach this $1 trillion target requires some pretty extreme bullishness surrounding the current business's viability, as well as hope that it successfully taps new markets. That's not rational thinking.
To be clear, I believe this lofty goal won't happen. Based on the company's ongoing struggles, investors should avoid the stock at all costs.
