Summary
- Peloton has doubled revenues for the last three years. The company boasts 3.1 million users and a retention rate of 92%.
- The stock has had a huge run-up thanks to the pandemic and now trades at 12 times sales and an enterprise value of $27 billion.
- The valuation is not cheap but there is still room for upside. I am taking a half position and will add more on a significant pullback.
Provider of high-tech exercise bikes and online fitness classes, Peloton (PTON) recently delivered its first quarterly profit alongside revenue that was up 172% year over year. Since then, the stock has continued to move to new highs even as the broader market has dipped.
Prospects
Prospects for Peloton over the next five to ten years look good. The company is benefitting from two major trends: wellness and the global pandemic.
Lockdowns and social distancing have left people unable to go to the gym so they are staying indoors and using virtual fitness classes and home equipment instead. This trend will likely continue as cases of the virus pick up through autumn and winter.
The pandemic will eventually subside but fitness and wellness trends will continue for some time. Peloton has the opportunity to strengthen its brand in the home fitness market and penetrate other outlets like hotels and gyms.
Margins
Peloton bikes are sleek and expensive and subscriptions to online classes provide recurring revenue. This means Peloton can generate surprisingly high gross margins of 46%. Incidentally, margins risen from 34% in 2017.
Hardware margins are higher than Apple (NASDAQ:AAPL) and subscription prices add stickiness and stability. The company doesn't exactly print money but its business model seems to be working well.
Financials
Price to earnings is unreliable here since Peloton is in growth mode and re-investing capital for future growth. Cash is going into projects like new bikes, treadmills, geographic expansion as well as marketing.
Revenue growth, on the other hand, has been robust, growing at an impressive 100% for the last three years. An enterprise value of approximately $27 billion with trailing revenue of $1.8bn means the stock is currently trading at around 12 times revenue which is pricey but not stratospheric considering such growth.
Researchers at S&P Capital IQ think revenue growth could continue at Peloton at 47% through 2021. If we apply a similar multiple of 12 times to that projection, we get a market value of $32 billion, implying an upside of around 18% from the current level.
However, this projection was made before the full effects of the pandemic and they now look timid, considering Peloton's latest quarterly revenue was up a whopping 172% and yearly revenue up 100% to $1.8bn.
With virus cases ticking up and winter approaching, there's reason to believe that strong growth will continue at Peloton for at least the next two quarters. If revenue was to double again in 2021, then a 12x multiple would imply an upside of 60% from the current level. Optimistic, but perhaps obtainable longer term.
On the balance sheet, total debt is manageable at $545 million, which is about three times below annual revenue and three times below net cash.
