A deep dive into the Peloton Interactive opportunity

09 Jul 2021

By Eric Lee, Account Manager, Phillip Futures

Peloton Interactive Inc. (Nasdaq: PTON) is the largest interactive fitness platform in the world, with a loyal community of more than 5.4 million members. They pioneered the connected, technology-enabled fitness and streaming of immersive, instructor-led boutique classes to their members anytime, anywhere. Peloton Interactive makes fitness entertaining, approachable, effective, and convenient, while fostering social connections that encourage their members to be the best versions of themselves. Their world-class instructors teach classes across a variety of fitness and wellness disciplines, which include indoor cycling, indoor/outdoor running and walking, bootcamps, yoga, strength training, stretching, and meditation.

Business Model

Peloton Interactive is a hardware technology company that manufactures and distributes fitness devices, namely its Peloton Bike and Tread. Its devices are connected to the internet and thus allow users to have virtual group workout sessions. Apart from selling its hardware products, Peloton Interactive gains revenue by charging users a monthly subscription fee as well.

Click here to learn more about their business model by watching a Peloton Interactive Inc. commercial.

Competitive Advantages

  1. Brand
  2. Network effects
  3. High switching cost (for those who purchased their Bike and Thread products)

Strong numbers that stood out from its Q3 2021 result, apart from its strong revenue growth and subscription rates, is its average monthly workouts per connected fitness subscription. One of the argument against Peloton Interactive was that it was a pure COVID-19 play that benefited last year as people were working from home. As the economy recovers from the pandemic, people are likely to head back to a physical gym and Peloton Interactive’s growth rate will decline from stratosphere. That may be true for awhile as can be seen from the chart that average monthly workouts dropped initially from peak of 24.7. Latest Q1 2021 report that this number rebounded and even broke a new high to hit 26 workouts per month. What this means is that the users love Peloton Interactive’s products and services to an extent that each subscription account recorded 26 workouts in a month, a very impressive number.

Source: Peloton Interactive Inc. Q3 2021 Report

Peloton Bikes and Thread products are not cheap. However, if there are 2-3 household members exercising, it makes this investment worth it as its monthly subscription allows user to set up multiple accounts for their family members. A single user who finds the investment expensive, can opt to subscribe to the app-access only plan and purchase a lower-priced substitute.

Peloton Interactive’s CEO, John Foley, said that the fitness company is aiming to have 100 million paying subscribers and laid out 6 strategies to achieve that lofty goal:

  1. U.S. growth
  2. Product innovation
  3. Geographic expansion
  4. Greater affordability
  5. Digital expansion
  6. Creating a welcoming work environment

Competitive Advantages

Based on past growth trajectory and the CEO’s long term target of 100 million subscribers, I did a projection that if the growth rate of new subscribers is at 100% for Q3 2022 and subsequent growth rates slow down at a 20% reduction yearly, Peloton Interactive’s subscribers may hit 25 million by Q3 2026. Taking an assumption of 50% Digital subscribers ($12/month) and the other 50% of All-Access subscribers ($34/month), plus the ratio of 5:1 for the revenue generated from its hardware sale to subscriber revenue, Peloton Interactive’s revenue is projected to hit $43 billion by Q3 2026, as shown in the table below.

Source: Eric Lee’s using Excel

Peloton Interactive is very young as a listed entity; market is still in the midst of finding its range of acceptable valuation. As such, I took guidance from Apple’s valuation as a basis for valuing the company. Reason being, like Apple, Peloton Interactive is a hardware company with software subscription added to its ecosystem.

Thus, based on the above revenue projected by Q3 2026, should Peloton Interactive trade at a Price-to-Sales valuation of 3x then, its share price may possibly trade at US$340. Should it trade at 8x Price-to-Sales valuation then, as Apple is trading at now, then its share price may trade at US$900. Peloton Interactive is currently trading at Price-to-Sales of 8.7x. As its multiples continue to normalise, as long as its revenue continues to grow at this projected rate, its share price may continue to appreciate, taking a lower end valuation of 3x Price-to-Sales in 5 years’ time.

Competitive Advantages

Source: Phillip MT5

Peloton Interactive dropped below the 250 days Moving Average briefly before crossing back up and was hovering in a range of $100-$115 the past one month, as can be seen from the attached hourly chart.

Price broke above the resistance of $115 and built up momentum as it traded higher. Next 3 resistance levels are at $125, $140 and $170. Support is at $100 and the next significant support is at $80.

Please be reminded to do your own due diligence on the company’s fundamentals & assess if the Fundamental & Technical analysis opinions are applicable to your trading or investing needs. 

Eric Lee is an Account Manager with Phillip Futures. With expertise in Futures, Forex, Stocks, and Unit Trust, Eric makes an all-rounded advisor. Make informed trading decisions without spending time combing through endless information as Eric readily provides clients with trade alerts and insights via WhatsApp. Over his years of experience, Eric developed systematic strategies in trading and investing. Book a complimentary coaching session below to leverage on his expertise as he imparts his knowledge to enhance your trading journey.

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