We think that Peloton stock (NASDAQ: PTON), an at-home fitness company that sells connected exercise bikes and treadmills, and related fitness subscriptions, is currently a better pick compared to WW International stock (NASDAQ: WW), a company best known for its weight loss and fitness services, despite Peloton’s richer valuation multiple. While Peloton trades at about 5.8x trailing revenues, WW International trades at just about 1x trailing revenue. Moreover, Peloton has also yet to turn an annual profit, compared to WW International, which has been almost consistently profitable. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard Peloton Interactive vs WW International: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Peloton’s Revenue Growth Has Been Stronger
Peloton’s revenues have grown at about 54% year-over-year over the most recent quarter (Q4 FY’21) to about $937 million, this is well ahead of WW International which saw revenues decline -7% over its most recent quarter. While Peloton continued to benefit from strong demand for its fitness equipment and improved supply of its products, WW is seeing a decline due to a tough comparison with last year, and a decline in its Studio fitness business, which saw its subscriber base drop almost 30% versus last year. Peloton’s average historical growth rate has also been higher and more consistent. For instance, Peloton has roughly doubled its revenues every year over the last three years, while WW International’s revenues have grown at a compounded rate of under 2% over the same period.
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Looking forward, Peloton revenues are estimated to grow 30% y-o-y to $5.2 billion in 2022, while WW will likely see a -5% decline, per our estimates. Our WW International Revenue dashboard provides more insight into the company’s revenues.
2. WW Has Thicker Margins, But Peloton Is Posting Better Margin Growth
Peloton remains loss-making, with its operating margins standing at about -5% over the last fiscal year. In comparison, WW International posted margins of about 15% over the last 12 month period. However, Peloton’s margins have been trending steadily higher. If we were to look at the last three-year change in operating margin, Peloton’s margins have seen more improvement, rising by about 17%, compared to WW margins, which declined -10%.
Looking ahead, Peloton is likely to see some margin pressure in the near term, on account of higher marketing spending and lower price realizations on some products due to recent price cuts. On the other side, WW International could benefit from its increasing digital push and possibly rising interest in its physical locations as the economy continues to re-open following Covid-19. That said, we still think that Peloton’s margins have more upside in the long-term given its digital services business, which has lower direct costs and more profit potential as revenues scale up.
The Net of It All
Now that over half of the U.S. population is fully vaccinated against Covid-19, with overall economic activity picking up, the demand for leisure products focused on the stay-at-home trend is likely to cool down a bit. However, both the companies have positives to look forward to. Peloton, for example, is focusing on expanding into commercial areas and acquiring new customers via its corporate wellness program and via deals with healthcare companies. WW International, despite recent headwinds, could also see a recovery in its Studio business, which accounted for almost half its subscription revenues prior to the pandemic.
Although WW International’s current valuation is much lower than Peloton’s valuation, with Peloton trading at 5.8x trailing revenue, compared to WW at just about 1x, we think Peloton justifies this premium due to its stronger growth rates and long-term margin potential. Peloton also has lower financial risk, with its debt as a percentage of market cap standing at 3%, compared to WW which has a debt to a market cap of around 115%. Although Peloton has been called a “pandemic stock,” we think the company and its business will prove resilient, given its strong consumer lock-in via hardware, its expansion into international markets, and the launch of more affordable products. Peloton stock also remains down by about 46% since mid-January, potentially presenting a good entry point for investors.
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