Is Peloton Finally a Buy?

Despite concerns, there are reasons to consider PTON shares as a long-term investor. So, is it time to buy the dip now that the stock has plummeted?

The Peloton Backstory

You’ve likely seen Peloton commercials that advertise its range of workouts and equipment, including its infamous spin bike. But where did the journey begin for this at-home gym brand?

While Peloton appeared to pop out of nowhere, reacting to the need for at-home fitness solutions, the company has been around for a decade. First founded in January 2012, Peloton aimed to bring the “excitement of boutique fitness into the home.” The concept sprung from the need to balance the founders’ love of workout classes with their demanding jobs and busy families.

Once the pandemic hit, Peloton’s revenue went through the roof. In September 2020, the company reported that its sales and subscribers roughly doubled in the 12 months that wrapped up its fiscal 2020 year. This news came less than a year after the company’s IPO, when shares sold for $29. From that point, little changed until April 2020, when the stock began to soar. By January 14, 2021, shares of PTON hit an all-time high of $171.09.

But in recent weeks, shares of PTON slipped under $10 — so what happened?

The Peloton Bubble Burst

In 2020, shares of PTON skyrocketed, resulting in a 434% gain. The company nearly reached a market cap of $50 billion, but as of this writing, the market cap is down 93%, sitting just north of $3 billion.

During the pandemic, consumers flocked to Peloton as they were stuck at home and sought a way to work out. As we head back into a more normalized world without such restrictions, Peloton is experiencing slow sales, increasing losses, and a company that has lost its edge with Wall Street. Higher oil prices have resulted in higher shipping costs for the company and supply chain constraints have hampered delivery times.

Was Peloton a Pandemic Fad?

Peloton is still a relatively young company, and even before the pandemic hit, the at-home exercise brand doubled its sales every year. When looking back at Peloton’s 2019 IPO, it had been selling bikes for five years at the time. When it went public, 92% of all bikes sold still had an active subscription. For fiscal 2021, the company maintained a 92% retention rate, which is impressive.

These high retention rates say one key thing: Customers love and actively use Peloton products. The company’s lineup has grown to include the flagship Bike, Bike+, Tread, and Guide. The company is also adding an upcoming rowing machine.

As Buffett likes to say, find a company that delights its customers, and Peloton is doing just that. When examining customer reviews, the Bike has an average rating of 4.8 out of 5 stars based on nearly 20,000 reviews.

Reasons to Consider Buying Shares of PTON

What’s more exciting is the community that exists among Peloton enthusiasts. The company has 7 million members on its own platform. Four out of five subscribers weren’t even in the market for home exercise equipment before making a purchase. This data shows that the company does not just attract workout fanatics and is expanding its addressable market.

So, what about competitors? A direct competitor is Nautilus, an exercise equipment manufacturer that has been in business since the mid-1980s. Today, the company has a market cap of just $60 million (that is not a typo!) and generated around $590 million in the last 12 months. In contrast, Peloton’s 12-month revenue was $3.8 billion.

Is Now the Time to Buy?

As we embark on another tough year with the possibility of a recession looming, it’s wise to ask if this is the right stock to add to your portfolio. When considering Peloton’s cumulative new loss of $1.9 billion over the past four quarters and the economy, will the company survive?

Peloton over-invested when it was on top and is now sitting on a huge amount of inventory. However, the company has a new CEO, Barry McCarthy, who is focused on growing the subscription side of the business — an aspect of the company that offers higher margins and greater customer lifetime value.

Bottom line — If this well-received fitness hardware and software company embraces McCarthy’s restructuring plan and continues on a new financial path, solid returns could be on the horizon for those who buy shares at the current price.