Is Peloton Stock Overvalued?

Peloton Interactive Inc (NASDAQ:PTON) rose to become a $40 billion company in 2020. The connected fitness company reported 232 percent year-over-year growth during a pandemic that pushed people to spend more time working, playing, and learning at home.

But as the company’s stock continues pushing up during the holiday season, some analysts wonder is Peloton stock overvalued?

Fitness crazes have come and gone – Bowflex, Tae Bo, Body by Jake, ThighMaster, the Shake Weight, the Ab Roller, and more have had their time in the spotlight. None of these fitness fads lasted beyond a decade after their release.

So, is Peloton another flash in the pan, or is it a lasting platform that will replace gyms moving forward? It’s time to take Peloton for a spin to see if its numbers work out or if they’ll leave investors running out of breath.

Why Peloton Stock Went Up

The holiday season couldn’t be any more different than the previous year for Peloton. After its September 26, 2019 IPO, the company lost $1.5 billion in value due to backlash over its holiday commercial.

A woman in the ad is gifted a Peloton bike by her husband and then documents her journey getting into shape for his approval. It was universally hated and mocked as an insane holiday purchase. Fast forward through successive lockdown periods, and Peloton is now the belle of the ball among consumers and shareholders.

That’s because global stay-at-home and lockdown orders generally specified gyms and fitness centers in their proclamations. Of all things, gyms became the speakeasy of the coronavirus pandemic. Like the homebrew culture before it, Peloton was exactly what this new Zoom-powered world needed.

Peloton’s exercise bikes feature live and recorded exercise classes from fitness professionals. It’s one of the only ways to take spin cycle classes with instructors virtually and it gave people a way to exercise while couped up in their homes.

There’s no wonder Peloton became the next exercise sensation – the question is whether the interactivity will help it break the cycle of fitness fads to become a long-lasting at-home fitness necessity.

Here’s an overview of the company’s financials to give a clue as to what is to come.

Peloton Financials Are Eye-Popping

Peloton has an astonishingly high P/E ratio of 1,116x. While Tesla P/E ratio rivals it, most other companies have ratios less than 40. Generally anything north of 50 and certainly 100 is high so a 1,000x P/E ratio is eye-popping and cause for vertigo among value investors.

The company’s most recent earnings report showed $757.90 million in revenue, which beat estimates of $733.74. This gave it earnings per share of $0.20 on the back of strong sales.

This was its Q1 Fiscal Year 2021 report. Peloton’s total membership grew to 3.6 million by the end of that quarter.

This includes 510,000 paid digital subscriptions and 1.33 million connected fitness subscriptions. Each subscription averaged 20.7 monthly workouts, versus 11.7 the same quarter of last year.

It’s improvements like this that made investors come running, but it could just be at the peak of its product cycle.

Is Peloton Valuation Too High?

Because its P/E ratio is over 1,000, bearish analysts fear Peloton investors may become victim of a tech bubble bursting in 2021.

The company’s quarterly revenue of $757.9 million led to $69.3 million of profits, which gives the company a 15.7 percent gross margin.

These numbers make it difficult to scale, and it will need big numbers to continue growing over the next year.

Guidance estimates $1.0 billion in total revenue for the Q2 FY2021. It expects to increase gross margins to 39 percent off this.

A major concern for investors is when the economy and gyms reopen, Peloton could find itself riding off a cliff.

The company estimates it will pull in $3.9 billion of total revenue for the year, which makes its > $40 billion valuation seem high. This is especially true if its subscribers start to dwindle with the reopened economy.

If the company can’t sustain the sales growth, it could find itself sitting on a large volume of expensive unsold inventory. This is because it’s far from the only company that offers a subscription service with workouts from real personal trainers.

Will Peloton Stock Drop?

Peloton may have created a fast lane for growth of its stationary exercise bikes, but it didn’t corner the market.

Companies like NordicTrack, Schwinn, and Echelon have direct competitors in place, and there are alternatives like VirZOOM that add virtual reality to traditional stationary bikes.

And that’s just for the spin class crowd.

There are connected fitness products rising from every corner. The Mirror, for example, enables a variety of exercises and trainers to sign up. Yogifi brings connected technology to a yoga mat. FightCamp puts a boxing spin on it.

Each of these connected at-home workout solutions could become the next big thing. Fitness trends come and go, and although the exercise bike is a longtime staple of professional gyms, they haven’t proven their longevity in home gyms.

The idea of spending $1,900 for equipment that takes up space in your house plus $40 per month is a tough ask, especially when the industry average gym membership is $58 for a full range of equipment. The math doesn’t work out for any but the most hardcore enthusiasts.

Everyone else may just ride a real bike until the gyms reopen.

Is Peloton Stock Overvalued? The Bottom Line

Peloton made huge gains in 2020 as the world was stuck at home by government orders. Gyms struggled to stay open throughout the year and hardcore gym rats turned to the smart fitness company to get classes with personal trainers.

The subscription model proved effective, but it’s unclear how well it will last beyond the pandemic. Fitness trends are notoriously short-lived, and Peloton could be either at the peak of its 15 minutes of fame. 

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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.