Peloton Interactive Inc: Why the Bears Could Be Wrong About PTON Stock

Will This Tech Stock Climb to New Highs?

After stocks shoot through the roof, concerns tend to rise. This is particularly the case with the red-hot tech sector in 2020, a year in which triple-digit gains have been common.

Considering that most companies haven’t increased their business by the same magnitude as their stock prices during the incredible bull run, it makes investors wonder whether the current share-price level is sustainable.

One of the biggest gainers in 2020 has been Peloton Interactive Inc (NASDAQ:PTON), a company that offers an interactive fitness platform. Peloton sells stationary bicycles and treadmills with large touchscreens that allow paid subscribers to stream immersive, instructor-led classes.

It’s pretty easy to see why PTON stock turned out to be a high-flying ticker in 2020.

The COVID-19 pandemic resulted in shutdowns in many regions, so that meant gyms and fitness studios were closed. One consequence was that more people had to work out at home. And at-home workout solutions are exactly what Peloton Interactive Inc offers.

The company completed its initial public offering (IPO) in September 2019. As the below chart shows, Peloton stock was trading mostly sideways up until March 2020, at which point it fell alongside other stocks during the pandemic-induced sell-off.

But then market participants quickly realized that, when other companies were struggling due to the impact of the pandemic and the resulting lockdowns, Peloton’s business was pandemic-proof.

As investors rushed to buy the company’s shares, the stock skyrocketed. Since the beginning of April, PTON stock has soared by a staggering 375%.

Peloton Interactive Inc (NASDAQ:PTON) Stock Chart

Chart courtesy of StockCharts.com

Now, a closer look at the above chart reveals that, since reaching a high in mid-October 2020, Peloton stock has been consolidating instead of keeping its upward momentum. And that can make people wonder whether the party is over for PTON stock.

Well, if you look at the company’s fundamentals, you’ll see that there are still plenty of reasons to like Peloton.

As is the case with most pandemic-proof tech stocks, Peloton’s sales have been growing throughout this extraordinary period. In the fourth quarter of the company’s fiscal year 2020, which ended June 30, its total revenue rose 172% year-over-year to $607.1 million. (Source: “Q4 2020 Shareholder Letter,” Peloton Interactive Inc, September 10, 2020.)

Fast-forward three months and things looked even better. Peloton generated $757.9 million in revenue in the first quarter of its fiscal year 2021, which ended September 30, 2020. The amount marked a staggering 232% improvement from the year-ago period. (Source: “Q1 2021 Shareholder Letter,” Peloton Interactive Inc, November 5, 2020.)

What’s just as impressive, though, was the bottom line. When Peloton went public in 2019, the company was not profitable. In the June 2020 quarter, it turned a profit of $89.1 million. Peloton also managed to stay profitable in the September quarter, earning net income of $69.3 million.

One of the main drivers behind the company’s growth was an expanding user base, particularly the number of its “Connected Fitness” subscriptions. At the end of September 2020, Peloton had 1.3 million Connected Fitness subscriptions, which marked a 137% increase year-over-year.

Note that users need to purchase one of Peloton Interactive Inc’s Connected Fitness products to use the Connected Fitness subscription. And those products—namely stationary bicycles and treadmills—are not cheap. The lowest-price offering is currently the “Peloton Bike,” which starts at $1,895.

Growth in the number of Connected Fitness subscriptions not only provided huge sales in equipment, but also laid the foundation for a massive recurring business from membership fees.

And while the momentum in Peloton stock does not seem as strong as before, the momentum in the company’s business is expected to continue. Management projects that, by the end of the company’s fiscal year 2021 (June 30, 2021), there will be at least 2.2 million Connected Fitness subscriptions.

If Peloton reaches that guidance, it would mark another 63% expansion in the company’s core user base from the end of September.

Analyst Take

Don’t forget that Peloton is not just a stay-at-home stock. Sure, some people have signed up for the company’s service because gyms were closed. However, these people have already committed thousands of dollars to get the equipment. Do you think they’ll all cancel their Peloton subscriptions when the COVID-19 pandemic is over?

Bottom line: Peloton Interactive Inc’s business has thrived during the pandemic, and the company is well positioned for the long term. With an expanding subscriber base, monstrous sales increase, and a positive bottom line, PTON stock could remain a hot ticker for growth investors.