What Will Peloton Stock Look Like In 2025?

by Trefis Team
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At-home fitness major Peloton (NASDAQ: PTON) has been one of the big winners through the Covid-19 pandemic, with its stock up by over 5x since the first set of Covid-19 lockdowns back in March 2020. The stock now trades at about $105 per share, or almost 6x projected FY’22 revenues (fiscal years end June) and 200x FY’22 EPS. Is this expensive? Probably not, considering that sales could potentially grow almost 2.4x over the next four years (FY’24), with the company also expected to improve its profitability considerably from FY’22 onward.

We believe Peloton’s revenues could potentially rise close to 2.4x from the levels of $4 billion in FY’21 to $9.5 billion by FY’25, representing a compounded annual growth rate of almost 24%. For context, that’s still well below the solid 145% CAGR the company is on track to post between FY’18 and FY’21. Although the end of Covid-19 – a big tailwind for Peloton – appears to be in sight, there are multiple secular trends that should help to grow sales post the pandemic. The economics of owning a Peloton compare favorably with gym memberships and spin classes, and the added convenience of working out from home should give customers a reason to buy Peloton. Moreover, Peloton should benefit from the easing of current supply chain bottlenecks, with the company planning to build out its own U.S. factory, which is likely to commence operations from 2023. Peloton’s international expansion – which is just getting started – is also likely to drive sales growth. Sure, revenue growth could be still higher if we consider Peloton’s possible push into commercial-fitness applications post its acquisition of Precor, but 2.4x growth in the top line over the next four fiscal years looks very much achievable as a base case.

Combine revenue growth with the fact that Peloton’s net income margins (net income, or profits after all expenses and taxes, calculated as a percent of revenues) are on an improving trajectory. Net margins rose sharply from -13% over the first nine months of FY’20 to almost 4% over the same period in FY’21. Margins probably have a lot more room to expand as revenues increase, given Peloton’s solid unit economics. Peloton has a vertically integrated model which includes hardware, software, and subscription services, somewhat similar to tech titan Apple. Gross margins stood at about 39% for the first nine months of FY’21, just a hair below Apple’s 40% odd margins. It’s probably not far-fetched to assume that net margins could approach 20% by FY’25. Considering our revenue projections of roughly $9.5 billion and 20% margins, almost $1.9 billion in net income is possible by FY’25.

Now, if Peloton’s revenues grow 2.4x, the P/S multiple will shrink by almost 60% from its current levels, assuming the stock price stays the same, correct? But that’s exactly what Peloton’s investors are betting will not happen! If revenues expand 2.4x over the next few years, instead of the P/S shrinking from around 6x presently to about 2.5x, a scenario where the P/S metric falls more modestly, perhaps to about 5x looks more likely, considering the fact that profitability is also projected to see sharp improvement. This would make a 50% plus growth in Peloton’s stock price a real possibility in the next four years. This would likely take Peloton’s market cap from about $31 billion currently to almost $48 billion by FY’25.  Although the stock is likely to remain somewhat volatile through the post-Covid reopening, as investors cycle into value and commodity stocks to ride the economic upturn, we think Peloton should deliver solid returns for investors in the medium term.

See our analysis on Peloton Stock Chances Of Rise for an overview of Peloton stock’s recent performance and where it could be headed over the next month.

[6/3/2021] What’s Happening With Peloton’s Stock? 

Peloton’s stock (NASDAQ: PTON) is up by almost 9% over the last week (five trading days) outperforming the  S&P 500 which has remained roughly flat over the same period. The recent gains are driven by favorable views from brokerages, and also as investors likely see increasing value in the stock following its almost -30% decline this year. So how is Peloton stock expected to trend in the near term? Is the stock poised to decline further or is a recovery looking likely? Based on our machine learning engine, which analyzes Peloton’s stock price movements post its 2019 IPO, the stock has a 64% chance of a rise over the next month, after rising by about 9% over the last five trading days. See our analysis on Peloton Stock Chances Of Rise for more details.

We also think the longer-term outlook for Peloton’s business is solid. We expect demand to remain strong even post Covid-19, as the economics of owning a Peloton compare favorably with gym memberships and spin classes. Moreover, Peloton’s business should continue to benefit from supply chain improvements with the company planning to build out its own U.S. factory, which should commence operations from 2023. Peloton also recently closed its acquisition of Precor, a company that caters to commercial-fitness applications such as gyms and hotels and this could help to expand the Peloton brand and product range. Peloton’s international expansion is also just getting started, and this could also help the stock. While Peloton trades at a relatively lofty 6x projected FY’22 revenues (fiscal years end in June), this is justified by its high growth rates and thick margins. Consensus estimates point to a healthy 30% plus growth in revenues over FY’22 and gross margins have typically come in at about 40%.

[5/6/2021] Peloton’s Tread+ Recall An Buying Opportunity?

Peloton’s stock (NASDAQ: PTON) fell by almost 15% in Wednesday’s trading, after the company said that it would be carrying out voluntary recalls of its treadmill machines – the Tread+ and Tread over safety issues, offering users a full refund. The Tread+ treadmills were reportedly responsible for dozens of accidents and the death of at least one child.  Peloton stock is now down by close to 50% from all-time highs seen in January, as it has also been hurt by a broader rotation out of growth and “at home” stocks, with the Covid-19 pandemic receding in the U.S. So is Peloton stock worth a look at current levels of about $82 per share? We think it is.

Now, the current recall marks a PR setback for Peloton, which initially brushed off concerns that the U.S. Consumer Product Safety Commission (CPSC) raised about its treadmills in April. The financial impact of the recall could also be somewhat meaningful. The recall is likely to involve over 125,000 Tread+ machines which cost about $4,300 each, and a small number of Tread machines that have seen a very limited roll out in the U.S. If we assume that 70% of customers opt to return the Tread+ (customers also have the option of keeping their treadmills and having Peloton relocate them to rooms not accessible by children), that would translate into refunds to the tune of over $375 million, excluding logistics and other costs. For perspective, Peloton’s revenues stood at about $1.1 billion last quarter. The company has also stopped the sale and distribution of Tread+ as it works on hardware modifications and this could also impact revenues this fiscal year.

That said, a majority of Peloton’s hardware sales come from its exercise bikes and we think the demand is likely to remain strong even as Peloton fixes its treadmills. Treadmill-related accidents are also not unique to the company. Per the CPSC, there were 17 deaths related to treadmills in the U.S. (across manufacturers) between 2018 and 2019. As Tread+ sales eventually resume, the company should see volumes pick up. Moreover, Peloton’s business should continue to benefit from supply chain improvements, the launch of new and lower-priced products, and its international expansion, which is just getting started.

So is Peloton stock expected to decline further in the near term or is a recovery looking likely? Based on our machine learning engine, which analyzes Peloton’s stock price movements post its 2019 IPO, there is a strong chance of a rise over the next month, after declining by about 17% over the last five trading days. See our analysis on Peloton Stock Chances Of Rise for more details.

[4/20/2021] How Peloton’s Treadmill Safety Issues Impact Its Stock

Peloton’s stock (NASDAQ: PTON) fell by over 7% on Monday and remains down by around 9% over the last week (five trading days) compared to the S&P 500 which is up by about 1% over the same period. The sell-off comes as the U.S. Consumer Product Safety Commission (CPSC) said that the company’s Tread+ treadmills were responsible for dozens of injuries and at least one death. The Commission also asked people with young children or pets to stop using the Peloton treadmills, while urging the company to carry out a recall of the product. So how will this impact Peloton? Now, treadmill-related accidents are not unique to the company. Per the CPSC, there were 17 deaths related to treadmills between 2018 and 2019. However, we think Peloton may need to respond with some safety-related software updates or possibly hardware enhancements in the future. The recent events could create some image-related issues for Peloton, which has been one of the pandemic’s biggest winners. So how is Peloton stock expected to trend? Is the stock poised to decline further or is a recovery looking likely? Based on our machine learning engine, which analyzes Peloton’s stock price movements post its 2019 IPO, the stock has a 64% chance of a rise over the next month, after declining by about 9% over the last five trading days. See our analysis on Peloton Stock Chances Of Rise for more details.

[2/16/2021] What’s Happening With Peloton Stock?

Connected fitness company Peloton’s stock (NASDAQ: PTON) has risen by about 10% over the last week (five trading days). The recent gains come on the back of a rally in the broader markets, with the S&P 500 is up 3% over the same period, and also due to positive views in recently initiated sell-side coverage on the stock. That said, Peloton stock remains down by about -19% year-to-date, driven by the broader correction in growth stocks and pandemic winners such as “at home” stocks. So is Peloton stock poised to rise further or is a correction looking imminent? Based on our machine learning engine, which analyzes Peloton’s stock price movements post its 2019 IPO, the stock has a 77% chance of a rise over the next month, after rising by about 10% over the last five trading days. See our analysis on Peloton Stock Chances Of Rise for more details.

So what’s the longer-term outlook for the company? We think Peloton looks like a good bet for long-term investors for a couple of reasons. The stock trades at close to 9x projected FY’21 revenues (fiscal years end in June). Although that looks somewhat high for a company that sells fitness equipment, Peloton justifies this for a couple of reasons. Firstly, Peloton is growing fast, with revenues on track to more than double in FY’21 driven by Covid-19 related demand. Growth should remain strong in the medium term as well, on account of supply chain improvements, the launch of new and lower-priced products, and international expansion. For perspective, Peloton’s revenues are projected to rise 35% in FY’22 per consensus estimates. Secondly, Peloton’s unit economics also look solid, meaning that it should become quite profitable as revenues continue to scale up. Gross margins stood at almost 40% as of the last quarter, with roughly 35% margins for products and 60% margins on connected fitness subscriptions. That’s even higher than consumer technology behemoth Apple (NASDAQ:AAPL), which has gross margins of about 39%.

[2/16/2021] What’s Happening With Peloton Stock?

Peloton’s (NASDAQ: PTON) stock has gained about 5x over the last year, making the at-home fitness company one of the biggest winners through Covid-19. Here’s a quick rundown of the recent developments for Peloton’s stock.

Firstly, Peloton published a strong set of Q2 FY’21 results (quarter ended December 31, 2020), beating market expectations. Revenue grew 128% year-over-year to $1.06 billion and the company also posted a small profit. Connected fitness subscribers grew to 1.67 million at the end of the quarter, marking an increase of 134% year-over-year, and the number is expected to grow to 2.28 million by the end of the fiscal year. Connected fitness subscribers pay about $40 per month to access and sync classes to their Peloton equipment.

One of Peloton’s biggest issues has been that it isn’t able to fulfill demand quickly enough. Although this might seem like a nice problem to have, Peloton risks alienating potential customers and hurting customer experience. This has been a factor holding the stock back since the holiday quarter, with Peloton underperforming the S&P 500 year-to-date. However, the company says that it now plans to invest over $100 million in air freight and expedited ocean freight over the next six months to help speed up its deliveries.

Separately, Peloton recently raised about $875 million in capital via a convertible debt offering at a 0% rate. The company will not pay any interest on the notes till they mature in 2026 and the conversion price stands at about $239, about 55% ahead of the stock’s current market price. This looks like an attractive deal for Peloton, enabling it to invest in its fast-growing business without immediately diluting existing shareholders. [1]

See our interactive analysis Peloton (PTON) Valuation: Expensive Or Cheap? for a detailed look at Peloton’s valuation and financials.

[12/31/2020] Peloton Stock Updates

While Peloton’s (NASDAQ: PTON) stock saw a big sell-off after news of Pfizer’s Covid-19 vaccine in early November 2020, the stock is now up a solid 50% since then and is up by roughly 35% over December alone. So what are the trends driving Peloton’s surge? Firstly, the workout-from-home trend has continued to rise, and demand for Peloton’s products continues to significantly outstrip supply. For example, the premium Bike+ exercise bike has seen delivery timelines slip to 10 weeks currently. Secondly, Peloton was recently added to the Nasdaq 100 stock index. This move results in higher demand for the stock from index funds tracking the Nasdaq. Thirdly, the company announced last week that it would be acquiring Precor – one of the world’s largest commercial fitness equipment suppliers. This is being viewed very positively for a couple of reasons.

Precor has deep relationships with gyms, fitness centers, and hotels and this could also help Peloton expand its reach to these sectors, as they recover post the pandemic. Peloton could also integrate its digital and connected fitness capabilities with Precor equipment. Peloton is also likely to leverage Precor’s expertise and expand beyond its core offerings of bikes and treadmills to other equipment such as ellipticals and climbers. Precor has a total of about 625k square feet of manufacturing space located in the United States. With these facilities complementing Peloton’s existing manufacturing infrastructure in Asia, it should eventually ease manufacturing constraints.

[12/7/2020] Is Peloton A Fad?

Connected fitness company Peloton’s (NASDAQ: PTON) stock is up almost 4x this year, trading at levels of about $115 or about 8x projected FY’21 Revenues. Peloton’s recent growth partly justifies these valuations – it has effectively at least doubled Revenues each year over the last three years and is on track to double Revenues again in FY’21 (fiscal years end in June). However, as the early phase of growth dies down and Covid-19 related demand declines, could the company’s success be a flash in the pan? Or is Peloton building a sustainable competitive advantage? While it’s still too early to tell, we think that Peloton’s business model has a lot going for it.

High Switching Costs: Peloton’s business model focuses on building commitment via its pricey, but high-quality exercise bikes and treadmills. Once customers invest in its high-cost hardware, it’s likely that they will continue to pay for the monthly connected fitness subscription service (about $39 per month) to get the most out of their equipment.  This is evident from the fact that churn rates stood at just 0.65% in Q1 FY’21 – well below most subscription-based digital services. [1]  The company is also looking to significantly broaden its reach, by launching slightly lower-priced equipment and indicating that it could eventually sell pre-owned bikes.

Favorable Experience For Users: The overall experience of spin classes and fitness lessons are highly dependent on the quality of instruction, and Peloton’s team of instructors have obtained celebrity-like fame. This is a big positive, as Peloton’s model scales well compared to physical fitness classes. The economics of owning a Peloton also compare favorably with gym memberships and spin classes. The average monthly cost of just a gym membership was about $58 in the U.S. in 2018, while Peloton’s connected program costs $39 a month and can also be shared among family members.

Brand Buzz, Social Features: Being one of the first movers in the connected fitness space, Peloton has built significant brand value.  The company is also building social features that could help to engage users and build a sense of community around its platform. This network effect could also help to prevent customers from churning out of its platform. Peloton is also counting on its lower-priced digital fitness subscription ($13 per month) as an acquisition channel for its pricier equipment and connected fitness offering. The company said that Digital Subscriptions grew 382% to over 510,000 over Q1.

[9/11/2020] Peloton’s Valuation

Peloton (NASDAQ: PTON) is an at-home fitness company that sells connected exercise bikes and treadmills and related fitness subscriptions. The stock is up over 4x year-to-date, as the Covid-19 pandemic and related lockdowns caused people to stop going to gyms and fitness centers and work out from home, causing demand for the company’s products and services to soar. Peloton now trades at about 8x projected FY’21 revenues, ahead of Apple (NASDAQ:AAPL) which trades at about 6.5x. Does this make sense? We think it does. In this analysis, we take a look at the company’s financials, future prospects, and valuation. See our interactive analysis Peloton (PTON) Valuation: Expensive Or Cheap? for more details. Parts of the analysis are summarized below.

An Overview of Peloton’s Business

Peloton Interactive sells connected fitness equipment including bikes (starting at about $1,900) and treadmills (starting at about $2500) with a monthly Connected Fitness Subscriptions ($39 per month), which streams and syncs instructor-led boutique classes to users bikes and the Peloton Digital Membership ($13 per month) which streams classes to mobile devices and smart TVs. The company’s Product and  Service bundle is positioned as an alternative to not just other exercise equipment, but to gyms and fitness center memberships. Although the company’s products are priced at a premium, the ecosystem – which combines hardware, software, and content – compares quite favorably in terms of price versus fitness classes and subscriptions. For perspective, the average monthly cost of just a gym membership was about $58 in the U.S. in 2018. [2] While Peloton sells primarily to individuals, it also has some exposure to the commercial and hospitality markets.

Peloton’s Financials 

Peloton has been growing quickly. Revenues rose from about $440 million in FY’18  (fiscal year ends June) to about $1.83 billion in FY’20, – an annual rate of over 100%. Equipment sales rose from about $350 million in FY’18 to $1.46 billion in FY’20, with the company delivering 626k Bikes and Treads over 2020 alone. Subscription Revenues grew from about $80 million to $360 million, as the company’s base of connected fitness subscribers rose from 246k in FY’18 to about 1.09 million in FY’20. Peloton’s total membership base rose to 3.1 million as of the end of FY’20, including users who only pay for its digital subscription (not connected to its equipment).  Over FY’21, we expect Peloton’s Revenues to grow to almost $3.6 billion, driven by continued growth in equipment sales and a growing base of subscribers.

While Peloton remained loss-making as of last year, the economics of its business look favorable. Overall Gross Margins are thick at about 47% in FY’20 with hardware margins standing at 43%. In comparison, even Apple – an icon of hardware profitability – posted Gross Margins of less than that at 40% over its last fiscal. While Peloton’s Operating Costs have been trending higher, they have been growing slower than Revenue. With Revenue projected to double this year, Peloton appears to be on track to turn profitable.

Peloton’s Valuation

Peloton stock currently trades at levels of close to $130 per share, valued at about 8x projected FY’21 revenues. While the valuation multiple might appear rich, considering that Apple – the most established hardware/software/services play – trades at about 6.5x – we think it is largely justified. Peloton’s Growth has been solid – with Revenues doubling each year over the last two years and sales are likely to double in FY’21 as well. Margins also have scope to improve meaningfully, considering the company’s high gross margins and low customer acquisition costs. Moreover, the company’s lucrative connected fitness subscription revenues are likely to be very sticky, as users who have invested in high-cost hardware are less likely to stop paying for its monthly service. Given the buzz surrounding the company’s brand, there may also be scope to double down on lifestyle and apparel products, taking on the likes of Lululemon and Nike.

That said, there are risks as well. Firstly, Peloton faces significant supply constraints at the moment. While a new manufacturing facility in Taiwan is likely to begin production at the end of the year, the company is still likely to miss out on some potential holiday demand. Secondly, as the Covid-19 pandemic eventually ends, investors could re-think the valuation of “at-home” stocks and this could at least temporarily impact Peloton’s valuation. Separately, tech giants – with their deep pockets and software ecosystems – could play a bigger role in the connected fitness space, challenging Peloton. For instance, Apple recently launched its at-home workout app, Fitness Plus, which provides guided workouts and connects with Apple devices such as the Apple Watch.

E-commerce is eating into retail sales, but this might be an investment opportunity for you. See our theme on E-commerce Stocks for a diverse list of companies that stand to benefit from the big shift.

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Notes:
  1. Peloton Press Release []
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