Is Peloton Stock A Buy?

Is Peloton Stock A Buy? Peloton (PTON) is an interactive recreation or “esports” company founded in New York City in 2012. The combination of stationary bikes and streaming media for coaching and classes has been an effective way for Peloton to grow its brand and dominate its sector of the market.

Ad blitzes have shown millions of passive viewers how Peloton’s interactive system works, which has spurred growth for this company’s product line.

Peloton’s 3600+ employees are spread across five nations: United States, United Kingdom, Germany, Canada and Taiwan, with large hubs in NYC and London.

The company takes its name from a common term for a cluster of riders in a bicycle race, (trans: “little ball”), and the fact that many Americans associate the word itself with the brand is part of the company’s track record to investors.

Peloton has also made headlines with acquisitions like Neurotic Media and Tonic Fitness Technology, but the company has also had to overcome obstacles related to product liability.

Earlier this year, the U.S. Consumer Product Safety Commission (CPSC) issued an urgent safety warning about Peloton’s Tread+ treadmill, where 39 incidents, including one death of a child, had been reported.

Peloton has also become embroiled in fights over music royalties, which settled for an undisclosed amount.

Peloton Market Share

Essentially, the Peloton business model, where users buy a stationary bike and sign up for interactive coaching and classes, means that direct competitors to the company are few.

In fact, looking at some of the bigger named competitors shows how Peloton’s market share is dominant in this vertical. One of them, SoulCycle, faces the prospect of maybe going public with gym owner Equinox, for a possible valuation of $9 billion compared to Peloton’s $31.3 billion market capitalization.

The other big runner-up, Flywheel, just finished a round of funding at $21 million. This is more fodder for proponents who believe that Peloton has its game on lock. That reality, plus the popularity of the Peloton training system mentioned above, has prompted some investors to take a buy and hold approach, believing that PTON has greater long-term potential, and that its moat will hold.

Does Peloton Have a Moat?

In the parlance of Warren Buffett, the “moat” symbolizes a defensive position where it’s harder for competitors to come in and rival a company’s operations.

According to the above-mentioned unique business model, Peloton does have somewhat of a moat, although contenders can offer their own hardware-connected fitness products, so the competitive advantage may not be very deep, or filled with alligators.

In fact, some analysts suggest that more competitors will be coming at upcoming trade shows and conventions. On the other hand, the specific model of streaming Peloton classes from world capitals like London and New York City is not something that is likely to be imitated: it’s much more likely that competitors would use a more generic approach to the training side, which could help PTON to preserve an edge as a sort of specialized or top-tier provider.

Are Peloton Revenues Growing?

Available revenue numbers show that Peloton is growing revenues handily. Quarter 2 revenue for 2021 is listed at $1.06 billion.

Contrast that to $757 million in the first quarter of 2021 and $607 million in quarter four of 2020, and we see that revenues have essentially almost doubled.

Then taking a wider view with revenue of 524 in Q3 2020 third quarter $466 million in Q2 of that year, we see that Peloton revenues did in fact double year-over-year.

Demonstrating the ability to grow profits and revenue gives the company real value, which is reflected in some of the equity activity pushing stock prices far above IPO levels.

What Rate Are Peloton Earnings Growing?

Here’s where things get a bit subjective. Technically, it looks like Peloton’s earnings-per-share decreased for the last quarter. However, the EPS beat estimates by double what analysts expected.

Earnings reports show Peloton reported earnings per share of eighteen cents, against analysts’ projections of nine cents.

However, Q1 EPS of $0.24 basic and $0.20 diluted means that EPS did not increase over that quarter. That’s unfortunate for those who are taking a stricter measure of EPS change over time, more or less in a vacuum.

For some context, Peloton’s balance sheet, as of Q1, noted a total of $2 billion in cash and cash equivalents, along with the company’s “investments in marketable securities.”

Company spokespersons cited first quarter operating cash flow of $312.1 million, and capital expenditures of $49.2 million. Most of the spending, execs revealed, was tied to building a new headquarters in New York City, facilities in London and Taiwan and some showroom expansions.

High demand, company reports indicated, created a backlog in deliveries, and subscription information was seen as a feather in PTON’s cap.

Peloton Management Quality

Peloton boasts a deep roster of fitness fanatics with experience in related industries.

However, detractors of the company’s future are suggesting that management will have to do more to increase earnings and maintain dominance in its market, which, some say, will be harder to do in the market of tomorrow, where new technology becomes old technology in the blink of an eye.

Peloton Financials Could Struggle

One of the biggest challenges for Peloton is the old market maxim that “past performance does not guarantee future results.” This oft-cited market rule reveals quite a bit about what PTON faces in the long term, as the company stays with a model begun in the infancy of electronic wearables and streaming media wars.

In other words, after meteoric growth in terms of stock price and other indicators, Peloton will have a tough hill to climb as it tries to maintain its growth in revenue and profits.

Historic charts show that from IPO valuations around $22 per share, the company’s stock rose as high as $160 in January, and has now settled in just over the hundred-dollar mark. That’s great growth, but as traders look beyond the current horizon, there’s the question of where the additional growth is going to come from.

There’s also the doubt over whether Peloton’s moat is substantial enough to prevent a flood of competitors, including blue chip brands from coming in to pillage the sector with rapid-fire innovations around fitness technology. For example, Apple, which already has a leading smartwatch system, could simply decide to go aggressive in tying that watch to fitness machines.

Is Peloton Stock a Buy?

Peloton is a clear market leader with a history of fast growing revenues. It was perfectly positioned at a time when consumers’ alternatives were severely restricted – closed fitness centers or the option of working out with a mask, which made aerobic activity less pleasant.

As the economy opens up and fitness fanatics can choose to spend under $100 a month on a gym or as much as $3,000 or more plus a monthly subscription for Peloton, it’s less clear whether the fast pace of growth will sustain traction.

Is Peloton stock a buy? The answer is in this chart.

 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.