Why PTON Stock Could Be an Opportunity
If you’ve been following markets long enough, you may have noticed that whenever there’s a sell-off, investors tend to first unload the stocks that went up the most.
That means tech stocks could be in danger. And indeed they are. The tech sector has produced many soaring tickers for most of the last decade. Now, due to the outbreak of novel coronavirus (COVID-19) around the world, the stock market has crashed, and many tech stocks have been dropping to the floor.
While the prevailing sentiment is to sell everything, there are tech companies that are well positioned to thrive despite the coronavirus outbreak. And once the situation improves and sentiment starts to turn bullish, investors who picked up these companies on the cheap might get big returns.
One tech company that deserves investor attention right now is Peloton Interactive Inc (NASDAQ:PTON).
Headquartered in New York City, Peloton currently sells two types of fitness machines: a stationary bicycle that costs $2,245 and a treadmill that costs $4,295. There are also more expensive packages that include accessories.
But don’t for one second think that this is just some company selling fancy fitness equipment. Peloton also runs an interactive fitness platform.
Both the Peloton exercise bike and treadmill come with large touchscreens, which allow users to stream immersive, instructor-led boutique classes anytime, anywhere.
The company’s “All-Access Membership” costs $39.00 a month. At the same time, Peloton Interactive Inc offers a less expensive service called “Digital Membership.” Costing $12.99 per month, the Digital Membership allows users to get access to Peloton’s fitness content anywhere, anytime through an app. (Source: “Membership,” Peloton Interactive Inc, last accessed March 24, 2020.)
While many businesses are closing down during the outbreak of COVID-19—which the World Health Organization has assessed as a pandemic—Peloton should do better than others.
You see, one type of business that will likely stay closed for a while is the gym. When people are stuck at home, they’ll probably be looking for home-based workout options. And that’s exactly what Peloton Interactive offers.
It should be noted that, while Peloton stock is a relatively new name to investors (the company completed its initial public offering in September 2019), it already has a huge following.
As a matter of fact, with more than two million members, Peloton is the largest interactive fitness platform in the world. (Source: “Company Overview February 2020,” Peloton Interactive Inc, last accessed March 24, 2020.)
Now, the main reason why tech stocks were so hot in the first place is that tech companies ran fast-growing businesses. When it comes to growth, Peloton has posted some numbers that are very impressive, even by tech industry standards.
In the second quarter of Peloton’s fiscal-year 2020, which ended December 31, 2019, the company generated $466.3 million of revenue, up 77% year-over-year.(Source: “Q2 2020 Shareholder Letter,” Peloton Interactive Inc, last accessed March 23, 2020.)
The number of All-Access subscribers, also known as “Connected Fitness” subscribers (the more expensive subscription) reached 712,005 by the end of December, representing a whopping 96% increase year-over-year.
The neat thing about Peloton is that, even though the company sells rather expensive fitness equipment, its large subscriber base provides it with a recurring revenue stream. At the end of its most recent reporting period, the company’s 12-month retention rate was 93%.
For full-year fiscal 2020, management expects Peloton Interactive Inc to earn $1.53 to $1.55 billion of total revenue, which would mark a 68% growth at the midpoint.
Meanwhile, they expect the number of Connected Fitness subscribers to reach 920,000 to 930,000 at the end of the fiscal year, which would represent a year-over-year growth of 81% at the midpoint.
The big question now, of course, is whether the company can achieve those numbers, given the coronavirus outbreak.
Will Peloton Interactive Inc Keep Growing Rapidly?
Well, like any recession, the one we are currently in—which is caused by the coronavirus—will lead to less spending. When people are stocking up on essential supplies and preserving cash, they are less likely to shell out thousands of dollars for a piece of fitness equipment.
But then, as I mentioned earlier, gyms have been closing because of the virus pandemic. When people want to work out at home, Peloton Interactive Inc provides a very convenient solution. And even though the equipment looks pricey, the company offers zero-percent long-term financing on both the stationary bike and the treadmill.
To put that in perspective, the average monthly cost of fitness cycling programs from Peloton’s competitors for two people can be substantially more expensive. Even for a single user, the Peloton bike would still be the cheaper option.
|Average Monthly Cost for One Person||Average Monthly Cost for Two People|
|Peloton Bike||$58 + $39 = $97
$39 only after 39 months
$58 + $39 = $97
$39 only after 39 months
(Source: “Company Overview February 2020,” Peloton Interactive Inc, op. cit.)
In other words, because of the financing solution and the monthly subscription program, Peloton may not be as expensive as it looks at first. In fact, the company revealed that its fastest-growing consumer demographic segment is actually people with household incomes lower than $75,000.
At the very least, for people who already have Peloton’s bikes or treadmills, the coronavirus-induced shutdowns will likely lead to more usage because they are stuck at home. And for an interactive fitness platform, increasing engagement should be good news.
Because there are multiple forces at play, it’s hard to say whether Peloton can grow faster than usual during the outbreak of COVID-19.
But with a large user base and a recurring revenue model, the company should have what it takes to run a solid business during this recession. And when most other industries are deep in the doldrums, that should be good enough reason to put PTON stock on an investment watch list.