Peloton (NASDAQ: PTON) Summary

Posted on by michaelli1216

By Khalid Nazir and Koushik Karthikeyan

Overview 

Peloton Interactive, Inc. is a provider of an interactive fitness platform. The Company provides connected, technology-enabled fitness and the streaming of instructor-led boutique classes to its members. The Company operates and manages its business in three reportable segments: connected fitness product segment, subscription segment, and other segments. Its connected fitness product segment consists of its Bike and Tread and related accessories. Its other segment consists of Peloton branded apparels (Reuters, 2020). 

Analysis 

Peloton (Millions) Q3 2019 Q4 2019 Q1 2020 Q2 2020 
Current Assets 1749.3 1857.1 1792.7 – 
Total Assets 2387.7 2584.2 2569.4 2981.8 
Current Liabilities 327.6 535.8 539.9 – 
Total Liabilities 811.8 1039.0 1052.1 1303.8 
Equity 1575.9 1545.2 1517.3 1678.0 

Peloton is trading at $97.73 per share as of the close on 26th September 2020. The fitness firm has seen its share price increase steadily since its IPO in September 2019. With the recent COVID-19 Pandemic, it had led to the closure of gyms and fitness studios for at least 3 months and the virus peaked during the Spring and some still are not open yet. Peloton has seen an ever-higher level in its stock price. Peloton’s revenue had increased by an impressive 99.3% over the past year and its earnings are forecast to grow 52.26% per year. 

Additionally, Peloton has recently reduced the price of its Bike and introduced a lower priced version of its Treadmill. This is key as one of the barriers to growth was Peloton’s price points, but now it has lowered them it allows more customers to join the peloton ecosystem. Even with the higher prices, Peloton subscriptions grew over 100% year on year from 2017 (Tseng, 2020). So now with easier entry into Peloton fitness, the rate of growth of subscriptions will most likely increase even more. 

In terms of opportunity for growth, Peloton has a SAM of 14 million households, with 12 million in the US, in which they only have reached 4% penetration. Peloton’s SAM has grown as their brand awareness has grown, but with little brand strength in international markets, there is no doubt their SAM will grow as they pour more money into international marketing. This means Peloton has good potential short term growth opportunities. Their TAM is 67 million households, of which 45 million are in the US. This provides evidence for the potential of Peloton’s long-term growth (S-1, 2020). 

However, despite this, Peloton has still failed to become profitable during this time despite the impressive increases in revenue and as a result currently sits on a negative return on equity figure of -4.3% compared to the industry average of 14.7%. However, it can be assumed that Peloton has not hit the economies of scale that is required to make the firm profitable as it has a healthy cash flow and will be able to operate for the next 3 years if it maintains this level. Peloton also does not carry any debt and as a result has very few liabilities as its growth has been all organic using the firm’s own revenue and funds. Peloton’s short-term assets ($2.2 billion) are able to cover its short-term liabilities ($772.2 million) as well as its long-term liabilities ($531.6 million) which shows that the firm’s financial health has a solid foundation (Simply Wall St, 2020). 

It is also important to note that the price to book ratio of Peloton is 16.95, compared to the industry average of 6.42 (PTON, 2020). This suggests that Peloton is overvalued compared to its competitors. However, this is most likely due to Peloton’s dominance in the home fitness market which means that investors are very high on the company. 

Conclusion 

Recommendation – Long 

Although Peloton has not been profitable as of yet, it’s consistent increases in revenue in the past years and the steady incline in the number of users subscribing to the platform has painted a bright future. Peloton is set to become profitable over the next 3 years and the future Return on Equity for Peloton is projected to be at a figure of 25.1% compared to the industry’s average of 14.7%. Peloton’s revenue is also set to increase at a higher rate compared to the industry’s average at 25.8% compared to 9.9%. It is also important to note that Peloton offers a social aspect to working out at home, something which other home workout methods, such as using free weights or resistance bands, do not. This gives it a very significant USP to dominate the home fitness industry in the future. 

However, there are many competitors that have seen the recent rise and success of Peloton and have now started to follow suit their business model, more specifically the workout sessions that Peloton charges a subscription for, even if consumers have already bought the hardware. One big name competitor which has recently appeared is Apple, with the introduction of Fitness+. Like Peloton it aims to provide a streaming workout service with the use of points and a leader board to help motivate those who use the service. The benefit to Apple being that it’s service directly interacts with the Apple Watch and so can track the number of calories burnt and/or the heart rate than Peloton and other competitors due to the sensors that Watch has. But you can still use the Peloton Apple Watch app to track your heart rate, pace and workout duration during a workout, and save that data to the Apple Health app. But as Apple has shown in the past, it is able to create an ecosystem which is second to none compared to its rivals within whatever industry Apple competes with and it will be interesting to see how Peloton can react when Fitness+ launches. 

Overall, the streaming workout industry is fairly new and so there is more than enough room for the competition to grow. Since Peloton has already made a name for itself and has been able to gain a cult following, it has set itself a solid foundation to build itself upon; it can be at the forefront and lead the industry. Given that Peloton has been growing consistently year after year and the recent troubles it has had with their supply not meeting their demand for their products due to the COVID-19 Pandemic, it is more likely than not the Peloton will become a profitable firm within the next few years (FT, 2020). 

References 

Industry Jargon 

  • Debt/Equity ratio – The debt to equity ratio is calculated by dividing a company’s total liabilities by its shareholder equity. It is used to evaluate a company’s financial leverage (i.e. how much of the firm is growing by using its own equity rather than borrowed funds) 
  • Price/Earnings Ratio – The price-earnings ratio (P/E ratio) relates a company’s share price to its earnings per share. A high P/E ratio could mean that a company’s stock is over-valued, or else that investors are expecting high growth rates in the future. 
  • USP – Unique selling point is the essence of what makes your product or service better than competitors. 
  • TAM – Total Addressable Market is the market that can be reached in the long term in current and announced markets. 
  • SAM – Serviceable Addressable Market is the market currently based on current product verticals and price points. 
  • Price to Book Ratio – The price to book ratio is calculated by dividing a company’s stock price by its book value per share, which is defined as its total assets minus any liabilities. Lower values tend to suggest that a stock is undervalued. 

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