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Peloton was one of the biggest winners of the era of repeated lockdowns and mobility restrictions in 2020, and its stock surged 450% last year as investors focused on the winners of the new normal. Now, with pandemic-related restrictions easing and supply bottlenecks coming to light, Peloton seems to be experiencing lower engagement and appears to be battling to preserve its market leadership. (See Peloton stock charts on TipRanks)
Despite these challenges, Peloton might be able to carve out competitive advantages in the long run, but I remain neutral on the company until conclusive evidence of such advantages can be seen.
Peloton is Facing Several Challenges
Peloton has a large membership base of over 5.9 million, but many users are returning to gyms and outdoor activities with the easing of mobility restrictions, and that is proving to be an obstacle to the company’s growth. According to data from Apptopia, the use of the Peloton mobile app has declined by 42% since April, which highlights the challenges faced by the company as a result of the reopening of the economy.
Peloton is also facing strong competition from Hydrow Rowing Machine, MIRROR, and SoulCycle, all of which are posing a threat to the long-term growth objectives of Peloton. Even though revenue has doubled in each of the last 2 years, Peloton has failed to break through to profitability, which is also a concern.
In addition to slow growth, investors could be concerned about the 20% price cut of the Peloton Bike, the company’s top-selling product, and the increased marketing spend to attract new customers. Although reducing the price of its flagship machine might help the company attract new customers, Peloton’s profit margins will come under further pressure as a result of this decision.
Moving in the Right Direction
The Peloton Tread, which was recalled a few months ago due to safety issues, is now available for purchase in the United States, United Kingdom, and Canada once again, with customers able to return existing treadmills for a full refund until November 6, 2022. On August 24, the company announced that it has improved the design and safety aspects of the Tread to address the concerns raised by the Consumer Product Safety Commission. Winning the trust of regulators and customers is key to Peloton’s expected success, and the company seems to be moving in the right direction on this front.
Additionally, Peloton paid a total of $78.1 million to acquire Atlas (NYSE:ATCO) Wearables, Otari Studio, and Aiqudo to expand its product and services offering beyond exercise equipment. It also expects to invest approximately $400 million over the next 2 years on building Peloton Output Park in Troy Township, Ohio to increase its manufacturing capacity and reduce order-to-delivery time window.
The popular fitness platform has been aggressively spending on marketing and securing partnerships to gain and retain new customers. To that end, the company has collaborated with UnitedHealth Group Incorporated (NYSE:UNH), Adidas AG (DE:ADSGN) (ADDYY (OTC:ADDYY)), and Beyonce to take its products to a wider audience.
Wall Street’s Take
Based on 22 Wall Street analysts offering 12-month price targets for Peloton Interactive, the average Peloton price target is $131.55, which implies an upside of 15% from the current market price.
Although this suggests there is a wide margin of safety to invest in Peloton, Wall Street analysts might be forced to downgrade the stock in the coming months if the company continues to report declining usage of its mobile app and exercise equipment. Many analysts are trying to gauge a measure of how Peloton will perform in the post-pandemic era, so it would be reasonable to expect analysts to update their valuation models with new data as they become available.
Takeaway
Peloton intends to boost growth with increased marketing spend and partnership deals, and expects to become profitable in Fiscal 2023. Although the at-home fitness market can be expected to grow in the future, Peloton needs to overcome many challenges to achieve its financial objectives in the next couple of years, which makes it a very risky stock to bet on.
At the time of publication, Dilantha Da Silva did not have a position in any of the securities mentioned in this article.
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