September 28, 2020 BARRON’S M3
it: execution, brand awareness, and pre-
mium technology leadership—and why
investors have been willing to award it a
nosebleed multiple.
Following a 10% rebound on Friday,
Peloton’s stock has soared 287% from a
year ago, to a record $97.73. It now trades at
11.8 times trailing 12-month sales, com-
pared with 3.8 times for the tech-heavy
Nasdaq Composite index. That’s a far cry
from February, when a large number of
bearish investors were betting on a price
decline and Peloton shares struggled to stay
above $30. The bears raised concerns about
the company’s total addressable market,
given fitness stocks in the past have strug-
gled amid shifting fads.
But the pandemic jump-started Peloton’s
path to profitability, while gyms closing
helped it save money on advertising. The
company’s rise could make it better-heeled
to fend off smaller competitors. Peloton re-
cently cut the price of its flagship bike and
launched Bike+, and announced plans for a
more affordable treadmill. A bevy of Wall
Street analysts gushed about the announce-
ment, as well as the company’s fiscal fourth-
quarter earnings report and a higher ser-
viceable addressable market. Of the 26
analysts listed by FactSet, 23 are bullish. The
stock’s mean price target is $152.60—imply-
ing 72% upside from recent levels.
That optimism, combined with Peloton’s
valuation, makes us hesitant to recommend
buying Peloton’s shares at these levels. But
skeptics will have to come up with a better
reason to sell than simply the specter of
competition. Yes, it’s clear that if Amazon
has any aspirations of committing to the
digital fitness space, it could challenge Pelo-
ton. And yes, the news came a week after
Apple unveiled a new $9.99 a month Fit-
ness+ service, which should compete with
Peloton $12.99 bikeless digital service.
But analysts argue that Amazon and Ap-
ple (AAPL) entering the space in effect vali-
dates its prospects. KeyBanc Capital Mar-
kets analyst Edward Yruma wrote in a note
last week that Apple Fitness+ “illustrates the
attractiveness of the home fitness space, but
has a long way to catch up to Peloton.”
But just because big tech wants in doesn’t
mean that it will succeed. Amazon, Apple,
and Google’s parent Alphabet (GOOGL)
have had their share of stumbles entering
new industries. Last year, Apple TV+ and
Google Stadia grabbed headlines, but nei-
ther has made waves. And even their suc-
cesses haven’t driven smaller competitors
out of business. Spotify, for instance, contin-
ues to grow despite Amazon, Google, and
Apple offering their own music services.
Peloton’s best analog may be Netflix
(NFLX). Netflix has managed to grow de-
spite competition from Amazon Prime
Video, Disney+, Hulu and others. Evercore
ISI analyst Lee Horowitz believes Peloton,
whose true profits will come from subscrip-
tions for its online classes, can do the same.
The analogy isn’t perfect—a viewer
might have subscriptions to multiple
streaming-video services, but is unlikely to
use more than one fitness app. But Peloton
has the advantage of its bike. It’s a pricey
proposition, but once Peloton makes a sale
of its $1,895 indoor cycle, it’s far less likely
to lose a customer to a competitor.
“Peloton investors should refer to Netflix
as a historical example in which a focused
market leader in a growing digital business
sees little impact from the entry of large
competitors,” Horowitz writes.
A lot could go wrong for Peloton.
There’s execution risk, a high valuation,
and the potential for slower-than-expected
growth. But competition is probably lower
on the list of concerns. The biggest risk for
Peloton stock is that Americans just return
to their-couch potato ways.
— Connor Smith
Industry Action
Performance of the Dow Jones U.S. Industrials, ranked by weekly percent change.*
Technology 2.56%
Utilities 1.11
Consumer Services 0.57
–1.23 Consumer Goods
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–1.84 Telecommunications
–1.93 Industrials
–3.46 Financials
–5.68 Basic Materials
–8.35 Oil & Gas
- For breakdown see page M32. Source: S&P Dow Jones Indices
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