Peloton’s [PTON] share price has seen astronomical gains so far this year, as the coronavirus pandemic has revolutionised the market for at-home fitness solutions. The stock has gained a massive 276.5% in the year-to-date (through 25 November) but, with rising concerns of competition, how will it continue to perform?
Peloton’s share price has nearly quadrupled in the 14 months since its IPO in September 2019, with the majority of this growth occurring during 2020. After reaching an all-time high of $139.75 on 16 October, Peloton’s share price has fallen sharply over the past month, despite a brief rally in early November.
That said, its $106.94 close on 25 November is still 293.59% up on Peloton’s share price of $27.17 at its IPO on 26 September 2019.
Work it out
Positive sentiment abounds, and for good reason. MarketWatch’s Philip van Doorn points out that, thanks to over-valuation of many growth stocks during 2020 and historical trends that favour value stocks in the wake of the US presidential election, investors are wise to look to value stocks in the current climate.
Peloton is one of the 20 stocks in the Russell 1000 Value Index rated Buy or equivalent by at least 80% of analysts, with the most 12-month upside potential implied by consensus price targets. The consensus target for Peloton’s share price is $124.33 on Marketbeat, which implies a 16.2% upside from the 25 November’s close.
The company has also attracted plenty of positive headlines outside the analyst community. Shares rose on 10 November after the announcement of a partnership with Beyoncé to produce a series of workouts to the singer’s music, following a survey of Peloton’s 3.6 million global members that made her the most requested artist.
Number of Peloton's global members
The partnership, which celebrates homecoming season for students of Historically Black Colleges and Universities (HBCUs), reflects the shift of many of these celebrations to virtual settings in light of the coronavirus pandemic, according to the company’s announcement.
This year got off to an inauspicious start for Peloton. On 5 February, it reported losses of $0.20 per share and Peloton’s share price fell by 12%. Further quarterly losses were announced on 6 May, but an encouraging 66% increase in year-over-year sales to $526m fuelled a surge in investor optimism and the stock continued to rise. On 10 September, net income of $89.1m was reported for the quarter to 30 June, Peloton’s first profitable quarter since listing. While net income for the period to 30 September fell to $69.3m, two back-to-back quarters of net profitability encouraged investors, and the stock soared.
Peloton's Q3 sales - a 66% YoY increase
On 15 October, Peloton’s share price hit its all-time high of $137.24, after a promising survey indicating that the majority of respondents had cancelled or plan to cancel a gym membership and several analysts raised their target prices. The next day, however, Peloton’s share price dropped due to a product recall and Pfizer’s [PFE] announcement of its COVID-19 vaccine release timeline, which heralds a possible end to the at-home conditions that have powered the company towards profitability.
As well as Peloton’s first quarter of fiscal 2021 earnings report, 5 November also saw Pfizer announce encouraging preliminary results from its vaccine, which has been weighing on the company’s share price. Since closing at $126.63 on 5 November, Peloton’s share price has fallen 15.5% to 25 November.
Peloton’s annual sales have roughly doubled every year since 2017, reaching $1.83bn in fiscal year 2020. Analysts seem to feel that the trend will continue for the current year, with Zacks Equity Research forecasting sales of $3.93bn for 2021. The rate of increase is predicted to slow considerably in 2022, for which sales estimates total $5.15bn. Analysts also feel profitability will continue to rise during this period, with Zacks forecasting EPS of $0.41 for 2021 and $0.80 for 2022. MarketScreener forecasts net income of $109m in 2021 and $247m in 2022, significant improvements on the $71.6m loss the company made in 2020.
Peloton's fiscal 2020 annual sales
Much of the pessimism that followed Peloton’s IPO focused on the premium pricing of its flagship products, as well as the huge marketing spend required to grow its business. In the meantime, however, Peloton has continued to pursue a growth strategy, and in 2020 it lowered the price of its original bike to $1,895 in order to create space for a higher-priced $2,495 model released in September. It has announced that a lower-priced $2,495 treadmill will be released in 2021 to supplement its currently available treadmill, priced at $4,295.
Price of Peloton's lower-priced treadmill - down from $4,295
Will this enable Peloton to continue growing? Perhaps but, in the view of David Trainer at Forbes, it won’t be fast enough to match the implications of its current stock value. While Q3 2020’s 66% increase in sales year over year looks impressive at first glance, the growth rate comparison with the year before — in which year-over-year sales grew 122% — shows that Peloton’s expansion is beginning to flag.
Trainer suspected the spike in fourth-quarter profitability was a coronavirus-related one-off (and the subsequent fall in net income in the first quarter of 2021 supports this view), and highlights that there are numerous, often cheaper competitors swooping in on Peloton’s remaining addressable market. Most worrying among these are Apple [AAPL] and Lululemon [LULU], both of which boast sizeable fan bases that will serve as natural audiences for their subscription-based fitness products.