By David Trainer, Kyle Guske II and Matt Shuler
We have been recommending that investors short Peloton since October 2020 . Even after falling 76% in 2021 and continuing to drop this month, Peloton’s valuation remains disconnected from the reality of the firm’s fundamentals and could fall much further.
We believe the stock will likely drop below $15 before it bottoms.
Peloton /zigman2/quotes/208035743/composite PTON +3.43% was at $37 a share when we wrote this report earlier this month. Our thesis remains unchanged. We saw the decline in shares coming for reasons long before the recent weakness.
The biggest challenge to any Peloton bull case is the rising competition from incumbents and startups across the home exercise equipment industry, along with Peloton’s continued lack of profitability.
For instance, Apple /zigman2/quotes/202934861/composite AAPL -1.28% has expanded its fitness subscription service, which already integrates with its existing suite of products. Amazon /zigman2/quotes/210331248/composite AMZN +1.62% recently announced Halo Fitness, a service for home video workouts which integrates with Amazon’s Halo fitness trackers.
Tonal, which counts Amazon as an early investor, offers a wall-mounted strength training device, and Lululemon /zigman2/quotes/204011506/composite LULU +1.12% offers the Mirror. Brands such as ProForm and NordicTrack have offered bikes, treadmills and more for years and are ramping up their efforts in subscription workout class offerings.
In response, Peloton announced its latest product, “Guide”, a camera that connects to a TV while tracking user movements to assist in strength training. Truist analyst Youssef Squali called the offering “underwhelming” compared to the competition.
Peloton’s struggles also come as traditional gym competitors are seeing renewed demand.
Furthermore, of its publicly traded peers, which include Apple, Nautilus /zigman2/quotes/206873003/composite NLS -7.09% , Lululemon, Amazon, and Planet Fitness /zigman2/quotes/203234487/composite PLNT -1.06% (PLNT), Peloton is the only one with negative net operating profit after-tax ( NOPAT ) margins. The firm’s invested capital turns are higher than most of its competitors but are not enough to drive a positive return on invested capital ( ROIC ). With an ROIC of -21% over the trailing 12 months, Peloton is also the only company listed above to generate a negative ROIC.
Peloton’s profitability vs. competition: TTM
|Company||Ticker||NOPAT margin||Invested capital turns||ROIC|
Sources: New Constructs, LLC and company filings.
Peloton is priced to triple sales despite weakening demand
We use our reverse discounted cash flow (DCF) model to quantify the expectations for future profit growth baked into the stock price. Despite a massive decline to $37 a share earlier this month (and more recently to $25 on a report that it was temporarily suspending its manufacturing of exercise bikes and treadmills and had hired McKinsey & Co. to help it lower costs, a report the company denied), Peloton is priced as if it will become more profitable than any time in its history.
We see no reason to expect an improvement in profitability and view the expectations implied by Peloton’s current valuation as still unrealistically optimistic about the company’s future prospects.
For those that think the stock has bottomed and might bounce back, let’s look at what the company has to do to justify a price of $37 a share:
improve its NOPAT margin to 5% (three times Peloton’s best-ever margin, compared to -8% TTM), and
grow revenue at a 17% CAGR through fiscal 2028 (more than double projected home gym equipment industry growth over the next seven years).