Peloton: 17% Upside Left Followed By Decelerating Growth
Summary
- The company is a pioneer of connected home fitness equipment with strong momentum increasing its market share by almost 10 times in the past 4 years.
- Its brand is one of the most popular among consumers with an NPS of 94 and a booming and vibrant community that keeps growing and promoting user engagement.
- It is also acquiring equipment company Precor which provides a revenue run rate of $240 mln and international expansion opportunities through its more established network.
- Despite the surge of its revenues by 100% influenced by the pandemic, our valuation based on a staggered P/S shows just 17% upside is left.
This article was amended on 8/11/2021 to reflect amendments to the market share observations and revenue projections.
Based in New York, Peloton Interactive Inc. (NASDAQ:PTON) is an exercise equipment company specialized in connected fitness through streaming virtual workout sessions and promoting user engagement in its community. In this analysis, we examine the company's rapid market share expansion as a pioneer of connected home fitness equipment as well as its branding growth and acquisitions to support its international expansion plans.
The company's fitness equipment products range from bikes to treadmills with an iconic large display panel for users to stream live workout sessions. As the US population becomes more health-conscious with increasing time spent on daily exercise, Peloton is capitalizing on the trend with its unique products and gaining market share rapidly. Furthermore, its solid user engagement is promoted through its live-streamed workout sessions from various fitness influencers leading to its solid branding growth. Lastly, the company has acquired competitor Precor which boosts its revenues and also provides international expansion opportunities with its established network.
Source: Peloton
Rapidly Gaining Share in Home Exercise Equipment Market
The US home fitness equipment market is valued at $14.5 bln in 2020 and is forecasted to grow at a CAGR of 2.9% through 2025. The market is driven by the rising health consciousness of Americans as evident by the rising engagement of the US population in daily sports and exercise activities. The percentage of the US population who exercise daily has increased to 19.3% in 2019 from 18.5% in 2010 as more people become more health-conscious.
Source: Statista
Capitalizing on the growing health consciousness, Peloton specializes in home fitness equipment featuring its Peloton Bike and Peloton Tread equipment. It pioneered connected fitness allowing users to stream on-demand home workouts that aim to replicate a traditional studio experience, including live group workouts, the ability to follow an online instructor, and a built-in community.
Source: Peloton
Despite its premium pricing with subscription fees of $39 per month, the annual costs of ownership still beat the costs of gym memberships. This is because when comparing the cost of gym memberships to its home fitness equipment, gym memberships are still higher than the total $468 annual subscription fee of Peloton. Peloton's equipment prices start at $1,995 and while it may be higher than competitors, it creates high switching costs due to sunk costs for consumers.
Source: The Hustle
Source: Forbes
With a specialization in connected fitness, the company’s market share as seen in the chart below of the fitness equipment, which includes indoor and outdoor equipment has swelled to 10.1% from just 1.3% in 2017 as revenues grew 735% in the period as the brand grew rapidly. We expect the growth of the market to be driven by the in-home equipment category in particular due to the rise of Peloton as one of the main drivers. Capitalizing on the rising health consciousness of the population and home fitness equipment market growth, we expect the company’s market share to continue growing rapidly to 37% by 2023 based on our revenue growth projections of a CAGR 33.5% of the virtual fitness market beyond 2022.
Source: Peloton, WSJ, MarketWatch, Statista
Peloton Market Share Forecasts | 2017 | 2018 | 2019 | 2020 | 2021F | 2022F | 2023F |
Peloton Fitness Products Revenues ($ mln) | 184 | 355 | 734 | 1,462 | 3,203 | 4,276 | 5,709 |
Growth % | 93.3% | 106.9% | 99.2% | 119.1% | 33.5% | 33.5% | |
Exercise Equipment Market Size ($ mln) | 14,028 | 14,310 | 14,633 | 14,497 | 15,100 | 15,587 | 16,026 |
Growth % | 2.0% | 2.3% | -0.9% | 4.2% | 3.2% | 2.8% | |
Market Share | 1.3% | 2.5% | 5.0% | 10.1% | 21.2% | 27.4% | 35.6% |
Source: Peloton, WSJ, MarketWatch, Statista, ResearchDive, Khaveen Investments
Strong Brand Recognition and Rising Popularity
Peloton's strong brand recognition and leading market position set it apart in the market for connected, technology-enabled fitness. The company has cultivated a very strong branding in the home equipment market as measured by the Net Promoter Score (NPS). The NPS score provides a gauge of the likelihood of customers recommending the brand to other consumers. The higher the score, the greater the customer satisfaction and likelihood of promoting the brand to others. Peloton's NPS is 94 which blows out its competitors such as SoulCycle at 50 and NordicTrack at only 15. It's also worth mentioning, Peloton's superb NPS also places it ahead of other hugely popular brands such as Apple (AAPL), Amazon (AMZN) and even PlayStation (SONY).
Source: The Snowball
It is even more impressive considering that this feat is achieved despite its premium pricing. One factor which influences its branding popularity is the quality of its interactive workout streaming videos with instructors and the availability of classes. The company taps major workout influencers with a strong following on social media as charted in the diagram below.
Source: Backlinko
Its Connected Fitness subscriptions provide a competitive advantage compared to traditional fitness and potential entrants. It is also building a business model with strong network effects by bolstering its users' experiences through social and community aspects by being able to share workouts and interact with others in virtual sessions.
Source: Peloton
On top of its strong fitness community, the company is also engaged with its marketing strategy through various channels such as advertisements, partnerships with celebrities such as Beyonce and offering a free 90-day app trial to entice users to download its connected fitness app. All in all, the company's commitment to technological innovation is a major advantage as it has led to the formation of a vibrant community of users from which the company not only derives recurring subscription revenues but also insightful data to continually enhance user experience.
Acquisition of Precor and Expansion Plans in International Markets
In April 2021, Peloton completed the acquisition of Precor to help maintain demand for its products. Peloton's $420 mln purchase of Precor is its largest deal ever and was mainly driven due to its significant manufacturing presence in the US by providing it with 625,000 sq ft of manufacturing space in North Carolina and Washington. Currently, the company's supply chain is dependent on third-party manufacturers and foreign suppliers especially in Asia, the company claims that expanding its manufacturing footprint in the US allows it to speed up its delivery to customers. We believe that this move may resolve its issue. In 2020, its customer deposits grew by $270 mln on pent up demand signaling that it could not fulfil orders and creating a backlog into 2021. The company also experienced increased orders during the holiday of the pandemic. Though, management has also previously cited other factors such as port congestion, periodic warehouse closures due to the pandemic, forest fires and hurricanes.
Furthermore, Precor's international presence in more than 100 countries with offices in the Americas, EMEA, and APAC region. This may help Peloton to increase its international presence as well. In comparison to Precor, Peloton only has physical stores in the US, Canada, Germany, and the UK. Also, the company is currently heavily dependent on the US market making up 95% of revenues in 2020 with the remainder in international markets. Thus, with the wider and established network of Precor, it may fuel management's expansion plans in the international market.
Source: Peloton
Additionally, the company will add Precor’s nearly 100 employees from its R&D team to aid in its technology and innovation growth. In terms of incremental revenues from Precor, management’s upcoming quarter’s guidance includes a contribution of about $60 million from Precor. This translates to roughly $240 mln (13% of total revenues) in additional revenues per year that could be generated from the Precor deal. Thus, we accounted for the Precor acquisition in our total revenue projections including $60 mln in 2021 and $352.82 mln in 2022 based on the annualized revenues with a growth rate of 33.5% based on our projected revenues for its fitness products in 2022.
Peloton Precor Revenue Projections ($ mln) | 2020 | 2021F | 2022F | 2023F |
Precor Revenues | 60 | 352.8 | 352.8 | |
Precor Revenues Growth % | 488.0% | 33.50% |
Source: Peloton, ResearchDive, Khaveen Investments
In addition to the Precor acquisition, the company is also expected to open its first US factory in 2023. This further emphasizes Peloton's objective to bring manufacturing closer to its headquarters and have closer control over the supply chain. The new factory will help the company avoid geopolitical tensions, allow further expansion into Europe, and improve economies of scale, according to John Foley, CEO of Peloton. The factory is also expected to reduce production costs allowing Peloton to lower their prices as well. Management also expects this new factory to allow faster shipping times. The Precor factories will also produce Peloton products in small quantities towards the end of 2021. Overall, the Precor factories and the Peloton factory launching in 2023 are expected to help the company meet demand and increase its presence in the US and Europe.
Source: Peloton
Thus, we view its move to expand its manufacturing capabilities and improve its supply chain to benefit the company in terms of lower costs. This is consistent with its rising gross margins from 38% in 2017 to 45.8% in 2020. This is as its COGS as a % of revenues declined by -6.5% on average in the past 4 years. As it continues to strengthen its supply chain, we expect its gross margins to increase to 61.4% by 2025.
Source: Peloton, Khaveen Investments
Source: Peloton, Khaveen Investments
Product Recall Risk
Peloton faces a heavy risk with its product recalls. In May 2021, the company recalled all its treadmills stating the safety concerns of its users. This occurred 72 reports of incidents and injury and one death caused due to the equipment. The main issue was people especially children being "pulled under the rear of the treadmill". This could negatively impact the reputation and branding of the high-end in-home fitness equipment maker. The treadmill is a fairly new product that has been on sale only since 2018. The recall affected about 125,000 treadmills that were sold with the company also issuing a public apology. Based on the average cost of Peloton's equipment in 2020 of $2,336, we estimate the revenue impact to be up to $292 mln based on 125,000 treadmills.
We should have engaged more productively with them from the outset. For that, I apologize - John Foley, CEO of Peloton.
The United States Consumer Product Safety Commission also issued an official statement regarding the matter. With a serious issue like this, the company needs to take the necessary steps to protect its brand. As such, Peloton is offering full refunds to all affected customers until the end of 2022. If customers wish not to accept the refund, Peloton will assist customers in shifting the treadmill to a room where children and pets do not have access. The company is also working towards software improvements and other safety features that will lock the treadmill when not in use. This could essentially prevent further incidents like this from occurring.
Valuation
The company has had an average revenue growth rate of 102.96% in the past 4 years. Its average gross and was 41.3% but net margins were -17.2% due to high SG&A costs at 42% of revenues. In comparison with competitors, its gross margins are similar compared to the average of 40% but net margins are lower at 8%.
Segment | Gross Margins |
Connected Fitness Products | 43.0% |
Subscription | 57.2% |
Source: Peloton
The advantage of Peloton is its subscription services provide recurring revenue streams with high gross margins of 57%.
Source: Peloton, Khaveen Investments
Similar to its negative net margins, its FCF margins averaged at -19.7%. In 2020, its operating income surged due to an increase of customer deposits of $270 mln from pent up demand. Also, the company invests in marketable securities of $540 mln in 2020 which led to the increase of capex. Excluding it, its average capex of fixed assets is 19%. As it continues it build scale and grow its earnings, we see its FCF margins improving.
Source: Peloton, Khaveen Investments
The company has a low leverage profile with a net debt of $133 mln in 2020 which is only 0.4% of its market cap. Its net debt has been stable and declined from $208 in the prior year with cash growing 538%.
To value the company, we applied a P/S valuation as the company is yet to become profitable and is in the rapid growth stage with projected revenue growth of 120% in 2021. It is the highest growing company in the home fitness market. Thus, we used a staggered P/S ratio based on the 3-year revenue CAGR.
Company | P/S | 3-Yr CAGR |
Peloton | 9.27x | 103.0% |
Nautilus (NLS) | 0.71x | 17.10% |
Johnson Health Tech | 0.99 | 15.50% |
Source: Seeking Alpha, WSJ
CAGR | P/S |
100%+ | 9.27x |
80%-100% | 7.59x |
60%-80% | 5.90x |
40%-60% | 4.22x |
20%-40% | 2.53x |
0%-20% | 0.85x |
Source: Seeking Alpha, Khaveen Investments
In 2021, its revenues are projected based on management's guidance of $4 bln including the addition of Precor revenues of $60 mln. Beyond that, its revenues are projected based the smart fitness market forecast CAGR of 33.5% through 2027.
Peloton Revenue Projections ($ mln) | 2020 | 2021F | 2022F | 2023F |
Product Fitness Revenues | 1,462 | 3,203 | 4,276 | 5,709 |
Product Fitness Revenues Growth % | 99.2% | 119.1% | 33.50% | 33.50% |
Subscription Revenues | 363.7 | 737 | 984 | 1,313 |
Subscription Revenues Growth % | 100.8% | 102.6% | 33.5% | 33.5% |
Precor Revenues | 60 | 352.8 | 352.8 | |
Precor Revenues Growth % | 488.0% | 33.50% | ||
Total Revenues | 1,826 | 4,000 | 5,613 | 7,375 |
Total Revenues Growth % | 99.6% | 119.1% | 40.3% | 31.4% |
Source: Peloton, ResearchDive, Khaveen Investments
Based on a P/S of 9.27x on its forecasted 2021 revenues of $4 bln, our model shows an upside of 17.1%.
Valuation | 2021F | 2022F | 2023F |
Revenues ($ mln) | 4,000 | 5,613 | 7,375 |
P/S | 9.27 | 4.218 | 2.534 |
Valuation ($ mln) | 37,080 | 23,674 | 18,688 |
Shares Outstanding ('mln') | 268.74 | 268.74 | 268.74 |
Price Target | $137.98 | $88.09 | $69.54 |
Current Price | $117.84 | $117.84 | $117.84 |
Upside | 17.1% | -25.2% | -41.0% |
Source: Khaveen Investments
Verdict
To sum it up, we analyzed the company's market positioning in the home fitness equipment market with solid market share gains and strong branding growth with the vibrant and sticky community of users as well as opportunities from its acquisition. As it capitalizes on the rising health consciousness of the population as the pioneer of connected fitness, we see its market share to continue expanding to 36% by 2023 based on our fitness product revenue growth projections of $5,811 in 2023 which is 297% higher than 2020 revenues of $1,462 mln. This is driven by its strong branding with one of the highest NPS of 94 and robust momentum on Google Trends. Its acquisition of Precor not only provides incremental revenues of a run rate of $240 mln but also provides it with expansion opportunities internationally. While its stock price has surged 70% in the past year, our P/S valuation shows some upside left as revenues are projected to grow 119% this year, but we also see growth tapering beyond that which affects the upside beyond 2021 based on P/S. Overall, we rate the company as a Buy with a target price of $137.98.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of PTON either through stock ownership, options, or other derivatives. 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.
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