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Buying Opportunity For Peloton After The Recent Pullback

Summary

  • With the pullback associated with the tech selloff, Peloton looks apt for an opportunity to buy this dip.
  • Peloton's growth potential and ability to continue growing subscribers and revenues at fast rates remains intact albeit with some obstacles.
  • From FY23 to FY25, Peloton can find leverage within subscriber growth as well as new channel expansion to drive revenues at an estimated 28% CAGR.
  • Supply chain issues and complications are the main major risk to the trade.

As the market digested soaring rates, valuations of high-flying tech stocks came under heavy pressure. Peloton (NASDAQ:PTON) shed over one-quarter of its value in just over six weeks, facing some tough forward multiples with inflection to profitability as sales growth soars. With the pullback associated with the tech selloff, Peloton looks apt for an opportunity to buy this dip, although there are some risks to be aware of moving forward.

Strong Growth Runway

Peloton kicked off February with a decent earnings report, posting a double beat while raising full year guidance, although comments on supply constraints sent shares tumbling ahead of the recent broader market selloff. However, Peloton's potential is visible and multiple contraction ahead of revenue growth realization provides a more attractive buying point.

Graphic from Peloton

Most financial and performance related metrics from Q2 showed triple digit growth YoY: revenues +128%, gross profit +115%, Connected Fitness subscribers +134%, total workouts +303%, and a shift to profitability.

For Q3, Peloton guided $1.1 billion in revenues, +110% YoY but reflecting only marginal sequential improvement, and 1.98 million CF subscribers, +123% YoY; for the fiscal year, revenue guidance was raised to $4.075 billion, +123% YoY, $300 million in EBITDA, and 2.275 million CF subscribers, +109% YoY.

Growth Expectations

Peloton's growth potential and ability to continue growing subscribers and revenues at fast rates remains intact albeit with some obstacles. For FY21, revenues could come in ~3% above guidance at $4.2 billion, with strong demand for products and international sales in the picture for 2H after the Tread debuted in the UK in late December. International sales channels also open up the door for CF subs to rise to 2.05 to 2.15 million, 5-7% above guidance. Net income could rise to $210 million, or $0.71 basic EPS, as revenues rise relative to expenses.

ChartData by YCharts

This article was written by

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PTON over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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