After observing the company for some time, including the fascinating rise and subsequent fall, I recently decided to buy shares of Interactive Platoon (NASDAQ: PTON). I don’t know yet if I’m making a big mistake or if this will turn out to be a lucrative investment decision, but I think the potential reward far outweighs the inherent risk.
This time popping up consumer discretionary stocks fell 75% in the past 12 months as investors shunned the winner of the pandemic. I understand the threat physical gyms, along with other connected fitness rivals, pose to Peloton. I am also fully aware of the problems faced by the company today. Nevertheless, I am optimistic.
Here are the top three reasons why I now own Peloton stock.
Nautilus (NYSE:NLS), which owns the Bowflex and Schwinn brands, has been around since 1986. Despite this long operating history, today it boasts a market capitalization of just $129 million (compared to Peloton’s $9 billion valuation). Additionally, Nautilus generated sales of $147.3 million in the three-month period ending Dec. 31, well below the $1.1 billion in revenue Peloton recorded during of the same period.
How did a company founded in 2012 crush the well-known and long-standing incumbent and become the dominant player in its industry in just a decade? It’s by providing an incredibly superior user experience.
Peloton currently has 2.8 million Connected Fitness subscribers (those who own equipment) who have access to thousands of workout classes from world-class instructors anytime, anywhere. Blending technology with fitness to develop hardware and software that users rave about like never before. That’s why Peloton’s 12-month retention rate and average monthly member churn rate in Q2 were excellent 92% and 0.79%, respectively.
“We have a great product, high NPS, low churn, and we’re the category leader. And that’s what makes us really excited for the future,” said CFO Jill Woodworth. Call for Q2 2022 results. Couple these favorable traits with a powerful brand, and Peloton’s chances of success are solid.
What co-founder and former CEO John Foley has done is admirable. He was rejected by thousands of early investors, but persevered and eventually built Peloton into the multi-billion dollar company we see today. But his recent mistakes, with overestimating demand at the top of the list, cost him his job.
Enter the new CEO Barry McCarthy, former CFO of Spotify and netflix. His financial background and familiarity with subscription-based business models gives me confidence that he will focus on controlling costs while trying to find ways to strengthen the recurring revenue stream.
It plans to use an experimental approach, testing new ideas and relying on data to inform decision-making. Presentation of a bundled pricing structure in certain markets is the first initiative to stimulate demand and reduce entry barriers for customers. Finding effective strategies to get more Peloton gear into more homes will be key.
McCarthy certainly has his work cut out for him, but I think he has the right plan of attack. A new perspective could be exactly what Peloton needs at present.
The market tends to overreact to both positive and negative news, often sending a company’s stock price well beyond a reasonable valuation. I think that was the case with Peloton in 2020 on the upside, and I think that characterizes the stock today on the downside.
The current Peloton share price bears a price/sales ratio of 1.9, the lowest valuation the company has ever had. To say there’s pessimism surrounding Peloton’s stock would be a huge understatement.
Understandably, investors fear that Peloton is just a one-hit pandemic wonder whose future won’t even remotely resemble the monster hit of 2020. However, the best returns on investment can sometimes be achieved when a business is priced as if it were doomed. If Peloton’s new management can leverage its incredible brand to drive consumer demand while containing operating expenses, I think the stock can be a big winner.
Expectations are extremely low, so any improvement in the coming years should support a rise in the share price.
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Neil Patel owns Netflix and Peloton Interactive. The Motley Fool owns and recommends Netflix, Peloton Interactive and Spotify Technology. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.