Coverage of the shares of this interactive fitness company were recently initiated at Bernstein with an ‘Outperform’ rating and at Bank of America, as a ‘Buy’.
Peloton Interactive, Inc. (PTON)
From Canaccord Genuity Research
From a modest start in a pop-up shop at the Mall at Short Hills in Millburn, NJ, Peloton Interactive, Inc. (PTON) has grown to 82 showrooms and over 500k subscribers. We expect strong growth ahead as the company’s unique, convenient, in-home connected fitness model appeals both to wealthy households and more value-conscious consumers hoping to save on fees for boutique fitness classes.
In the long term, we think Peloton should be able to reinvest subscription revenue into its platform and brand, fundamentally changing the way households engage with fitness. Stock pressure since IPO pricing likely reflects both general market weakness and the same eschewing of operating losses that has impacted other recent IPOs. We see this as an opportunity set against what we view as a conservative forecast, compelling business model, and limited direct competition.
Peloton should make a large market opportunity even larger: We estimate a global fitness market of ~$300 billion, with ~$90 billion being spent on gym memberships but only a small fraction going to in-home fitness. Boutique fitness is on the rise, claiming 12.2M of the 62.5M gym members in the US, and these numbers roughly coincide with Peloton’s target of 65M US middle- and upper-income households, 12M of which have sampled as interested in Peloton products at current price points. 80% of Peloton members were not in the market for fitness equipment at time of purchase, suggesting ample room to move the needle with showrooms and advertising. The opportunity is larger still when accounting for Canada, UK, and Germany, all current international markets for the company.
The company is extending leadership via four imperatives: 1) High-touch logistics model to manage quality, costs, & customer experience; 2) Connected Fitness Product (CFP) profits
funding omni-channel marketing costs; 3) community building; and 4) original content. Each of these model pillars should become stronger and self-reinforcing with scale, and taken together, should help the company continue to grow and lead the segment.
The business model provides foundation for growth: Peloton generates enough gross profit from CFP sales to largely cover sales and marketing expense, enabling rapid subscriber growth (we estimate 47% CAGR through FY24 to 3.5M subs) and greater investment in key areas like content and logistics. FY20 will be a heavy investment year along these lines, with two new flagship studios, a material increase in fulfillment capacity, and a new headquarters contributing to ~$285M in CAPEX and an EBITDA margin trough of (19%). After this year, we see an expanding Subscription contribution margin (from 59% this year to 69% in FY24, helped by scale and operating leverage) leading the way on a steady ramp towards EBITDA profitability in FY23.
Our $33 price target is based on ~5x fwd (FY21) revenue and is supported by our DCF and SOTP valuation.
Michael Graham, CFA, Maria Ripps, CFA, and Alexander Frankiewicz, Canaccord Genuity Research, www.canaccordgenuity.com, October 21, 2019