Is Peloton's Premium Valuation Justified?

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Dec. 10 2020, Updated 8:13 a.m. ET

Peloton started with a mission to bring the community and excitement of boutique fitness into peoples' homes in 2012. The coronavirus pandemic finally made this dream possible for Peloton. Since a large number of people have been working from home, they are also exercising at home.

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The COVID-19 pandemic has ignited a spark under Peloton’s stock price, which has surged by nearly 260 percent this year. Peloton is one of the major beneficiaries of the so-called “stay-at-home” trend. Will the uptrend in the stock continue? What is Peloton's stock forecast based on what the market expects from its financials going forward? 

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Peloton’s core offering is its exercise bike, which comes with a screen that allows users to join exercise classes and be monitored by an instructor. This gives you the feel of working out from a gym. While the standard bike costs $1,895, the next level, Bike+ Basics, costs $2,695. The all-access membership is $39 per month. 

Is Apple’s Fitness+ service a threat to Peloton?

Apple announced the launch date for its new subscription fitness service. On Dec. 8, Apple announced that its on-demand video workouts service, Fitness+, will launch on Dec. 14. The service will be somewhat similar to Peloton’s existing services including live and on-demand workout videos. However, the major difference is that Apple’s service won't entail the use of exercise bikes and treadmills like Peloton. 

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Peloton’s stock price declined by 6.3 percent on Dec. 10 following Apple's news. Peloton CEO John Foley said that Apple launching a fitness platform is a “legitimization” of this type of content. He said that Peloton is different and offers a more connected platform. A connected and a gym-like feel through a screen is what has propelled Peloton stock to the heights it's witnessing. Therefore, we don’t think that Apple’s service in its current form could be a major threat to Peloton.

Peloton stock forecast based on its financials

Currently, 26 analysts are covering Peloton stock. Among the analysts, 23 recommend a buy, two recommend a hold, and one recommends a sell. The median target price of $135.7 implies a potential upside of 22 percent from the current levels. Analysts expect the company to record sales growth of 115.6 percent YoY in fiscal 2021 and 32.7 percent YoY in fiscal 2022. 

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The story for earnings is completely transformatory. Analysts expect the company to report an EPS of $0.35 for fiscal 2021 compared to a loss of $0.32 last year. The EPS is expected to rise to $0.71 in fiscal 2021. The interesting thing to note here is that while the expected growth in revenues is just 32.5 percent YoY in fiscal 2022, the EPS is expected to rise by more than 100 percent. The numbers imply that the market expects higher margins from the company going forward.

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Is Peloton stock expensive?

Peloton is expensive and its stock price has been rising. Currently, the stock is trading at an 8.2x fiscal 2021 sales, which has declined from 9.4x about a month ago. Since then, Peleton stock has fallen due to positive COVID-19 vaccine news and Apple’s announcement about its fitness service launch. Compared to other hardware and software stocks in the space, Peloton's valuation might seem expensive, but its potential growth could justify the valuation. 

Whether or not a stock is expensive also depends on its future growth potential. For all of the stocks benefiting from the stay-at-home trend, a COVID-19 vaccine and the end of the pandemic could end their run. However, for some of the stocks, the trends might have shifted in a secular way. If consumers are comfortable working out from home with Peloton, they might continue to do so even after the pandemic ends.  

Peloton has built a strong franchise and brand value. Not only are its revenues expected to rise considerably, its margins are also expanding significantly due to low customer acquisition costs. Peloton's business model ensures that revenues are sticky. People are less likely to stop subscribing to its services after they have invested in the company's costly equipment. 

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