Should You Buy Peloton Shares After They Dropped?

November 6, 2020

Uncover - Peloton bike stock

Peloton Interactive Inc (NASDAQ: PTON), the exercise equipment fitness company, saw shares fall 7% despite beating earnings expectations. Should investors buy on the dip?

Tim’s Take:

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.

Building loyalty

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.

This material is categorised as non-independent for the purposes of CGS-CIMB Securities (Singapore) Pte. Ltd. and its affiliates (collectively “CGS-CIMB”) and therefore does not provide an impartial or objective assessment of the subject matter and does not constitute independent research. Consequently, this material has not been prepared in accordance with legal requirements designed to promote the independence of research. Therefore, this material is considered a marketing communication.

This material is general in nature and has been prepared for information purposes only. It is intended for circulation amongst CGS-CIMB’s clients generally and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this material. The information and opinions in this material are not and should not be construed or considered as an offer, recommendation or solicitation to buy or sell the subject securities, derivative contracts, related investments or other financial instruments or any derivative instrument, or any rights pertaining thereto. CGS-CIMB have not, and will not accept any obligation to check or ensure the adequacy, accuracy, completeness, reliability or fairness of any information and opinion contained in this material. CGS-CIMB shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.

Tim Phillips

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.

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