Peloton stock (NASDAQ:PTON) has gained almost 50% since mid-July to about $12.50, after testing all-time lows of a little over $8 per share. While Peloton has been weighed down by a host of issues, including declining sales and poor inventory planning, the company has planned a major overhaul of its operations, with plans to cut costs and turn profitable via a slew of initiatives. Last week, Peloton outlined plans to downsize its workforce as it shutters some warehouses and trims its distribution and customer services operations, opting for third-party deliveries. Peloton also intends to close a meaningful number of retail stores while hiking prices on some of its equipment. For perspective, prices of the flagship Bike+ will be raised by $500 to $2,495 with the Tread treadmill becoming $800 pricier, at $3,495. Moreover, in early July the company said that it would be moving away from in-house manufacturing of its fitness equipment, focusing on working with third-party manufacturers in Asia, in a move that could help simplify its supply chain and cut costs.
So is Peloton stock poised to rally further from current levels? While Peloton and its management have their work cut out in terms of the turnaround, there are some notable positives that we see for the stock, the first being Peloton’s lucrative subscription business. The business has continued to expand, despite the recent headwinds on the hardware side and this could provide a floor for the stock. Over Q3 FY’22, subscription revenue rose by 54% year-over-year to $370 million, with subscription gross margins rising by 350 basis points to 68.1%. Peloton’s core customer base also appears very loyal, with churn rates standing at a mere 0.75% – that’s roughly at par with Verizon’s wireless postpaid phone churn, one of the stickiest consumer subscriptions. Peloton also believes that it has some pricing power in this business, as the company bumped up its connected fitness fees to rise from $39 per month to $44 in July. Investors will be closely watching how the subscription momentum is holding up as the company reports Q4 FY’22 results on August 25th.
Peloton’s valuation is also quite attractive. The stock now trades at a mere 1x consensus FY’23 revenues, down from over 6x pre-pandemic. In fact, even if we exclude Peloton’s hardware business, Peloton is valued at under 4x estimated 2022 subscription revenues. There remains a real prospect that it could eventually be re-rated higher, as subscription revenues continue to account for a greater mix of sales. For example, over Q3, subscription revenue accounted for close to 39% of total sales, up from just 19% a year ago. We estimate Peloton’s Valuation to be around $20 per share which is well ahead of the current market price. Check out our analysis on Peloton Revenues: How Does Peloton Make Money for a closer look at Peloton’s business model, key revenue streams, and how they have been trending.
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|S&P 500 Return||1%||-12%||86%|
|Trefis Multi-Strategy Portfolio||2%||-12%||247%|
 Month-to-date and year-to-date as of 8/21/2022
 Cumulative total returns since the end of 2016