Courtesy of Peloton
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The threat of a well-heeled competitor gave
Peloton Interactive
investors a fright this past week. Competition, however, is the least of Peloton’s worries.
Here’s what happened. After the close on Monday, Echelon, a lower-priced Peloton competitor, announced that it had joined with
Amazon.com
(AMZN) to sell a “Prime Bike” that would cost $499. Peloton stock fell as much as 7% on the news on Tuesday, though it finished the day down just 0.4%. And then it got weird. An Amazon spokesperson said late Tuesday that the company had no formal partnership with Echelon, while Echelon CEO Lou Lentine told Fox Business that Amazon’s response was a “complete surprise,” citing conversations with Amazon in developing the bike.
Despite the fiasco, Peloton (PTON) shareholders got a wake-up call—the Echelon announcement and the immediate selloff suggested the risks to Peloton stock should a true rival come along and undercut the company on price.
But, for now, the Echelon-Amazon episode highlights what Peloton has going for it: execution, brand awareness, and premium technology leadership—and why investors have been willing to award it a nosebleed multiple.
Following a 10% rebound on Friday, Peloton’s stock has soared 287% from a year ago, to a record $97.73. It now trades at 11.8 times trailing 12-month sales, compared with 3.8 times for the tech-heavy Nasdaq Composite index. That’s a far cry from February, when a large number of bearish investors were betting on a price decline and Peloton shares struggled to stay above $30. The bears raised concerns about the company’s total addressable market, given fitness stocks in the past have struggled amid shifting fads.
But the pandemic jump-started Peloton’s path to profitability, while gyms closing helped it save money on advertising. The company’s rise could make it better-heeled to fend off smaller competitors. Peloton recently cut the price of its flagship bike and launched Bike+, and announced plans for a more affordable treadmill. A bevy of Wall Street analysts gushed about the announcement, as well as the company’s fiscal fourth-quarter earnings report and a higher serviceable addressable market. Of the 26 analysts listed by FactSet, 23 are bullish. The stock’s mean price target is $152.60—implying 72% upside from recent levels.
That optimism, combined with Peloton’s valuation, makes us hesitant to recommend buying Peloton’s shares at these levels. But skeptics will have to come up with a better reason to sell than simply the specter of competition. Yes, it’s clear that if Amazon has any aspirations of committing to the digital fitness space, it could challenge Peloton. And yes, the news came a week after Apple unveiled a new $9.99 a month Fitness+ service, which should compete with Peloton $12.99 bikeless digital service.
But analysts argue that Amazon and
Apple
(AAPL) entering the space in effect validates its prospects. KeyBanc Capital Markets analyst Edward Yruma wrote in a note last week that Apple Fitness+ “illustrates the attractiveness of the home fitness space, but has a long way to catch up to Peloton.”
But just because big tech wants in doesn’t mean that it will succeed. Amazon, Apple, and Google’s parent Alphabet (GOOGL) have had their share of stumbles entering new industries. Last year, Apple TV+ and Google Stadia grabbed headlines, but neither has made waves. And even their successes haven’t driven smaller competitors out of business. Spotify, for instance, continues to grow despite Amazon, Google, and Apple offering their own music services.
Peloton’s best analog may be
Netflix
(NFLX). Netflix has managed to grow despite competition from Amazon Prime Video, Disney’s (DIS) Disney+, Hulu and others. Evercore ISI analyst Lee Horowitz believes Peloton, whose true profits will come from subscriptions for its online classes, can do the same.
The analogy isn’t perfect—a viewer might have subscriptions to multiple streaming-video services, but is unlikely to use more than one fitness app. But Peloton has the advantage of its bike. It’s a pricey proposition, but once Peloton makes a sale of its $1,895 indoor cycle, it’s far less likely to lose a customer to a competitor.
“Peloton investors should refer to Netflix as a historical example in which a focused market leader in a growing digital business sees little impact from the entry of large competitors,” Horowitz writes.
A lot could go wrong for Peloton. There’s execution risk, a high valuation, and the potential for slower-than-expected growth. But competition is probably lower on the list of concerns. The biggest risk for Peloton stock is that Americans just return to their-couch potato ways.
Read more Trader: The Stock Market Had a Bad Week. At Least It Wasn’t a Terrible One.
Write to Connor Smith at connor.smith@barrons.com
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source https://blog.jsa.digital/index.php/2020/09/25/why-rival-bike-peddlers-are-a-plus-for-peloton/
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