Peloton: Pedaling Profits

05/27/2020 5:00 am EST

Focus: CONSUMER

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

Many of the history’s big winners are firms that have a new product or service that’s changing how a ton of people live, and we think Peloton Interactive (PTON) fits right in that category, notes Mike Cintolo, editor of Cabot Growth Investor.

The company is the pioneer of the connected fitness trend, where users can “attend” a workout class from their own home—usually via Peloton’s stationary bike or treadmill.

But the hardware, while well-built, isn’t the secret sauce; instead it’s the company’s numerous instructors that do live (from home nowadays, but back in studio once the virus clears up) and recorded shows for cycling, strength, yoga, cardio, you name it, providing customers with a massive collection of high-quality, on-demand content … for $39 a month.

And if you don’t want to shell out a couple grand for their bike (though there’s a free 30-day at-home trial available), you can use the firm’s app on your own for just $13 per month, which comes with most of the same great content.

Business has been growing rapidly for a while, and the virus shut-in has only helped the cause -- at the end of March, Peloton had 886,000 connected members (up 94% from a year ago; 90%-plus of members stick around, too) and another 176,000 signed up for the app, which drove Q1 revenues up 66% and helped EBITDA squeeze into the black (two years ahead of plan!).

And the momentum is continuing — as of May 12, it said it had crossed the one million connected member mark, leading most analysts to hike their expectations for the current quarter and 2020 as a whole. Long-term, the company has just 3% of its target market, so there’s huge room for growth both in the U.S. and overseas.

As for the stock, it was hot soon after its IPO last September, but then came the typical post-IPO droop, which cut shares in half by the March market bottom. But PTON came under intense accumulation right after that, with the Q1 report two weeks ago resulting in a powerful breakout on the stock’s heaviest volume ever.

After that big run, the stock has hit a couple of potholes this week, but the retreat has been reasonable. If the stock can calm down a bit (it’s been swinging 5% to 8% a day), it could offer a solid entry point. For now, PTON remains on our "stocks of interest" list.

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