As a global pandemic keeps everyone indoors, gyms all over the nation have been forced to remain closed. Is Peloton stock a good buy right now?
Despite numerous reports that lockdown restrictions could be lifted, and the likes of non-essential businesses such as Planet Fitness (NYSE: PLNT) banking on reopening soon, it could still be a long path back to normality. One stock that is benefiting greatly from this uncertainty is Peloton (NASDAQ: PTON).
We have already talked about stay-at-home stock’s such as Netflix (NASDAQ: NFLX), Zoom (NASDAQ: ZM), and Slack (NYSE: WORK), but rarely talk about Peloton. Now we ask: is Peloton a good investment?
The bull case for Peloton
Peloton has proven to be a rather divisive investment, with many investors pegging it as ‘just another meme stock’, much like how the likes of Virgin Galactic (NYSE: SPCE), Tesla (NASDAQ: TSLA), and Beyond Meat (NASDAQ: BYND) are often viewed. Aside from the occasional poorly-received commercial, there is no denying that Peloton has got a lot going for it right now.
First of all, what many people view as the company’s main weakness, its hefty price, is actually a great strength. Sure, $2,000 for a bike that doesn’t actually go anywhere might sound steep, but compared to well-known alternatives such as SoulCycle, it is actually cheaper. In the U.S. a Peloton bike sells for $2,245 including delivery and set up, but has a $58, no interest, monthly payment plan. Add on the standard subscription of $39, and you’re looking at $97 per month. That may seem like a lot, but according to Peloton, the average subscriber does 12.6 workouts per month, which boils down to $7.70 per class. SoulCycle charges up to $35 per class. Also consider that the average cost of gym membership per month in the U.S. is $58, not including add-on costs such as travel and classes.
Another reason to be bullish on Peloton is its subscription revenue growth. Over 84% of Peloton’s 2019 revenue came from the sale of connected fitness devices, but its recurring subscription revenue also grew 108% in the same period. At its February earnings call, the company reported 712,000 paid subscribers, up from 362,000 a year before. Before the pandemic, the company expected to add close to another 900,000 subscribers by the end of 2020, which will be quite significant if it manages to hold on to its current 12-month retention rate of 94%.
Finally, there is the elephant in the isolated room — the coronavirus pandemic. Despite cancelling its live classes in early April, consumers are increasingly turning to at-home workouts to maintain their fitness while under lockdown. Peloton has since extended its one-month free trial subscription to 90 days in a bid to bring in more customers should the pandemic prove long-lasting. In the past month, this increased usership has been reflected in the market, with Peloton stock up 30% in that period, and up more than 23% since its September 2019 IPO.
The bear case for Peloton
Peloton’s most recent earnings call, despite showing a revenue jump of 77%, also showed a widening net loss margin. Peloton said its net losses widened to $55.4 million, or $0.20 per share, from a net loss of $55.1 million a year earlier. As well as this, revenue growth was actually at a slower pace than a year previous, mostly due to turbulence surrounding the company’s IPO in September. Many analysts worry that its die-hard fanbase and rising sales can only take it so far, as its gross profit margin on equipment sold is still too low.
Add to this the fact that there are plenty of digital fitness assistants which can rival Peloton’s own service, including Fitbit (NYSE: FIT) — which is soon to become a Google (NASDAQ: GOOG) subsidiary — Apple (NASDAQ: AAPL), and Nike (NYSE: NKE).
Finally, Peloton is far from safe in the case of a recession. Should the market continue to spiral as a result of the coronavirus — which is likely considering unemployment reached 26 million last week — expensive services such as Peloton are unlikely to become priority payments for consumers with a sudden reduction in disposable income.
So, should I buy Peloton stock?
Despite its often-mocked image of being an upper-class stock for the privileged, Peloton makes a strong case for investors. Financing plans on hardware make it affordable, and its products have very high resale value. All this combined with a competitive subscription price make the product good value when spread over a few years.
It is also one of the few ‘pure plays’ out there, being solely concentrated on what it does — make and sell exercise equipment with subscription options. With the coronavirus likely to live on the public’s mind long after it has passed, at-home options could well be the future of exercise, and Peloton is beautifully positioned to benefit from this change in attitude.
Peloton instructors cannot see users’ heart rate or screen, and can only see output, cadence, and resistance.
Peloton prohibits users from modifying the bike to download other apps like Hulu or Netflix.
The bike is $1995 and never goes “on sale”, but Peloton will often offer complimentary items with purchases.
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