Peloton Stock Is Cheap Given Its Solid Subscription Business

Peloton's stock has seen another sell-off, falling by around 40% over the last month, as surging inflation, rising interest rates, and the prospect of a recession continued to turn investors away from growth stocks and pandemic favorites. Moreover, Peloton's Q3 FY'22 earnings were weaker than expected, with revenue declining to $964.3 million from $1.26 billion a year ago, as demand for at-home fitness equipment cooled considerably. This marked Peloton's first year-over-year revenue decline since it went public. Peloton's poor planning didn't help either, as inventory has piled up, eating into the company's cash just as sales fell. Net losses also widened to $2.27 per share, from about $0.03 a year earlier. Things are expected to remain tough over Q4 FY'22 as well, with the company projecting revenue of between $675 million and $700 million, well below consensus estimates, marking a decline of as much as 29% from the same quarter last year.

With the recent sell-off, Peloton stock now remains down by about 85% from all-time highs and by about 60% over the last year. Although it probably isn't wise to anchor to all-time highs for stocks such as Peloton which saw surging demand through the Covid-19 pandemic, likely a one-off event, we think the risk to reward positioning for Peloton stock is very favorable at current levels of around $14 per share.

Peloton's lucrative subscription business has continued to expand, despite the recent headwinds. Over Q3, 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 base of connected fitness subscribers – who pay for classes synced to their Peloton equipment – rose 40% to 2.96, million although quarterly net adds slowed considerably. Peloton's core customer base also appears very loyal, with churn rates standing at a mere 0.75%. Peloton thinks it has pricing power here, with its connected fitness fees set to rise from $39 per month to $44 in July. Peloton's hardware business is more of a gateway to the more lucrative subscriptions and Peloton now appears to be open to forgoing some upfront hardware-related revenues in favor of more content and subscription sales. For instance, the company recently lowered pricing on its original Bike by $300 to $1,195, with prices for the Bike+ dropping by $500 to $1,995. Even the company's new Guide strength training device went on sale at a lower than expected $295.

Separately, with travel and gym memberships on the rise once again following Covid, Peloton could see some upside from its acquisition of fitness equipment maker Precor and its deals with commercial establishments. Peloton's market cap currently stands at just under $5 billion, making the company an acquisition target for larger tech or lifestyle companies such as Apple AAPL , Amazon AMZN , or even Nike NKE . Peloton's valuation is also compelling. The stock now trades at just about 1.4x consensus 2022 revenues, down from over 6x pre-pandemic. There remains a real prospect that it could be re-rated higher, as subscription revenues 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 $30 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.

What if you're looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Invest with Trefis Market Beating Portfolios

See all Trefis Price Estimates