Peloton Basks in Celebrity Love While at Bottom of Nasdaq 100
(Bloomberg) -- In the often-snarky jargon of cyclists, Peloton Interactive Inc. has gone from the lead to the lanterne rouge.
The maker of technology-infused stationary bikes and treadmills has gone from a top position on the Nasdaq 100 Stock Index in 2020 to last place this year with a decline of 26%. Wall Street analysts, however, aren’t ready to jump off the bike just yet. In fact, Peloton has a higher percentage of buy ratings than just about every stay-at-home stock that’s been pummeled as the world begins to emerge from confinement.
Like other companies that have become synonymous with the lockdown era like Zoom Video Communications Inc. and DocuSign Inc., investors are worried that a return to normalcy will make it difficult for Peloton to maintain the rapid pace of growth brought on by the pandemic. That’s coincided with a newfound aversion to paying sky-high prices for the shares of faster-growing companies amid higher interest rates.
The New York-based company has managed to attract a cult-like following among legions of users that include celebrities like Lizzo, Miley Cyrus and Ellen Degeneres. They spend as much as $2,495 on a stationary bicycle or $4,295 on a treadmill, in addition to monthly dues, to be plugged into a virtual network of instructors and classes complete with thumping music. That combination of slick gadgetry, clubby user experience and recurring revenue from subscription services has helped Peloton win over Wall Street.
Of the 28 analysts tracked by Bloomberg that cover Peloton, 89% have buy ratings. The stock is trading at the widest gap to the average price target since it debuted in September 2019.
Peloton’s products have made fans even of those who dislike the stock. Simeon Siegel, an analyst with BMO Capital Markets who has one of the two sell equivalent ratings on Peloton, is enthusiastic about the company but not its valuation. At 8 times this year’s sales estimates, Peloton’s market value is over-inflated and doesn’t adequately account for the risk of increased competition, according to Siegel.
“Management has built something special, and we recommend the product to anyone who asks (and plenty who don’t) but shares are increasingly detached from fundamentals,” the analyst wrote in a research note last month.
Peloton’s closest publicly traded competitor is Nautilus Inc., which offers app-connected bikes, treadmills and ellipticals. While its stock has significantly outperformed Peloton over the past year, its price-to-sales multiple is a fraction of its competitor’s.
This year’s selloff in Peloton prompted MKM Partners to raise its rating this week to buy from neutral on what analyst Rohit Kulkarni sees as a bargain with a lot of overly negative assumptions about future sales priced into the stock. Peloton’s growth potential is intact and its large network of socially engaged users will help insulate it from competition, he said.
“The stock price represents a highly asymmetric risk-reward,” Kulkarni said in an interview. “It’s a smart trade all day if someone presents me with that risk-reward.”
While bulls like Kulkarni acknowledge that Peloton may not manage to expand at the same clip as the pandemic subsides, they point to developments in coming months that could help ignite a rally in the stock: an annual customer event that starts on April 30 where the company has teased “big news,” and the U.S. debut of its new treadmill on May 27. The stock snapped a three-week losing streak this week after Peloton reported plans to enter the Australian market.
Read more: Peloton Gains as Australia Is a Gateway to Asia: Street Wrap
Peloton has had trouble keeping up with demand due to shipping delays and Covid-related snarls. Last month, the company said it is investing more than $100 million over the next six months to improve delivery times, a move that will weigh on profitability.
It also delayed the rollout of its new treadmill in most U.S. regions by about two months to meet demand in other regions, including the U.K., where it has been available since December. The cheaper treadmill model starts at $2,495 and is smaller and less shock-absorbent than the more expensive model.
“We’re really excited about the tread opportunity,” Cowen analyst John Blackledge said in an interview. “They’re obviously a bike company at this point, but I think that’s going to change in the coming years.”
Blackledge estimates that about three times the number of people in Peloton’s core markets in North America and Europe use treadmills compared with stationary bicycles.
“I don’t think it’s peaked,” he said, referring to Peloton’s stock. “I think there are some levers that they have that could get the stock back up in the coming months.”
©2021 Bloomberg L.P.