Should You Buy Peloton Shares After They Dropped?
November 6, 2020
Peloton Interactive Inc (NASDAQ: PTON), the exercise equipment fitness company, saw shares fall 7% despite beating earnings expectations. Should investors buy on the dip?
Peloton has been one of the biggest pandemic-winning stocks given its connected fitness offerings and high-end bike machines and treadmills.
Shares are up around 300% since the beginning of the year. The company’s latest numbers for its first-quarter fiscal year 2021 were impressive.
Peloton posted earnings of 20 cents per share, nearly double the 11 cents a share of consensus expectations.
On the side of the subscriptions services, the company ended the quarter with Connected Fitness Subscriptions of 1.33 million – up 137% year-on-year. Meanwhile, its total revenue expanded by 232% year-on-year to US$757.9 million.
Peloton splits its business between its Connected Fitness Subscription and Digital Only. The former is the more lucrative business given Peloton provides the hardware such as its own pricey bikes and treadmills.
The Digital Only business, although less profitable, allows customers to access thousands of live and on-demand fitness classes in exchange for a monthly fee.
I’d previously questioned whether Peloton possessed the brand equity, as well as loyalty, to keep up its extraordinary growth once the pandemic passes.
However, I’m starting to come round to the strength of its ecosystem. Unlike a SoulCycle – remember them? – which operated studios, Peloton doesn’t have to deal with the overheads of rents or customers’ aversion to vigorously exercising amid sweaty bodies in the time of coronavirus.
Also unlike SoulCycle, Peloton doesn’t rely on “superstar” instructors to keep clients within its ecosystem. Expanding into other classes, such as bootcamp, strength and outdoor, Peloton is trying to broaden its appeal beyond just biking and running.
One thing I would like to see from it, though, is that subscription revenue making up a bigger portion of overall revenue. At the moment, subscription revenue came in at US$156.5 million – up an impressive 133% year-on-year – but still only one-fifth of overall sales.
If it can do that, it would strengthen my conviction that Peloton’s users are indeed willing to keep paying for a “sticky” product that offers both value and a good workout.
Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares of any companies mentioned.
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Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.
In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.