2020 was a banner year for Peloton (NASDAQ:PTON) stock. But, so far, 2021 has been tough on investors holding shares in this “future of fitness” play.
First, there’s been a general cycling out of pandemic plays (that is, names that “crushed it” due to the Covid-19 lockdowns). This has put downward pressure on PTON stock, which earlier this year was trading for as much as $171.09 per share.
The second major roadblock? A recent recall of the company’s Peloton Tread+ treadmills following reports of child injuries and one death tied to the product. This has added fuel to the fire. Since last month, the stock has fallen back to double-digit prices.
Admittedly, this is a setback.
The Tread+ may not have been one of its top-selling products. But the bad publicity from the incident was the last thing this company needed. Yet this massive pullback has been a grave overreaction. The company will get over this, even as it temporarily affects sales. A small part of its overall business, it’s not going to produce a “game over” moment for the company.
As for the longstanding “slowing growth” concern? Yes, growth is set to cool post-Covid. But with the stock’s declines, shares are a relative bargain at $84 per share. Today, PTON stock is more than reasonably priced relative to its long-term potential. The market will catch on to this, and realize shares have been oversold. Once that happens, don’t expect it to remain at its current depressed price levels for long.
PTON Stock and the Tread+ Recall
Again, it’s correct to say that the recent issues with the Tread+ has been a fiasco for Peloton. But the company has made the right move to recall the product, and its CEO, John Foley, has publicly apologized for initially refusing to take it off the market.
In terms of public relations, this may have been a disaster. And what about its financial results? The company estimates the treadmill recall will result in reduced sales of $165 million during its fiscal fourth quarter (ending June 2021). But, percentage-wise, its impact on this quarter’s sales will be less than 15%.
Peloton expects to bring treadmills back by the next fiscal quarter. In short, the financial impact will likely just be a one-time hit to results. Sales of its flagship stationary bikes continue. Not only that, business remains strong for the company’s main business, its fitness subscription service.
Based on the company’s most recent quarterly numbers and guidance, it continues to perform in line with expectations. The company’s overall sales growth may be slowing down. But, this is more than reflected in Peloton’s current valuation.
Shares Are Cheap After the Selloff
As mentioned above, the recall hasn’t been the only worry for investors when it comes to PTON stock. The company’s post-coronavirus-pandemic growth has been a concern as well.
Yes, growth is indeed slowing down, following last year’s off-the-charts run-up in demand. But while 35% projected sales growth is far less than the results seen this fiscal year, you shouldn’t assume that means the party’s over for this stock.
Following its declines, Peloton has fallen to a valuation (forward price-to-sales ratio of around 4.8x) that’s more than reasonable compared to its current level of growth. And for those skeptical that the company won’t even hit next year’s more muted growth projections? The company’s recent results and guidance point to the company living up to expectations.
For the quarter ending Mar. 31, 2.08 million Peloton product owners subscribed to its service. That was slightly above projections of 1.99 million subscribers. Guidance calls for this subscriber segment to grow by around 9.6% during this quarter. On top of that, the company continues to grow its subscriber base among those who don’t even own one of its fitness products. Digital-only subscribers now number 891,000.
We may no longer see the triple-digit percentage growth numbers this company posted while “social distancing” was in full-swing. But at their current beaten-down price levels, shares will look like a steal in hindsight.
Shifting Sentiment Makes Peloton a Solid Opportunity
The treadmill fiasco is unfortunate. And the subsequent recall is going to temporarily dent results. But investors have overreacted in their selloff of Peloton. With this incident not having a material effect on results, the company will quickly bounce back from this hiccup.
With regards to its growth prospects post-Covid, it’s clear investors have oversold the stock due to this issue as well. We may not see sales skyrocket to the extent they did during lockdowns and social distancing. However, at today’s depressed stock price, shares are inexpensive relative to the company’s projected 35% growth in the coming year.
Investors have erroneously turned negative on PTON stock. Use this to your advantage, and enter a position, as shares remain at double-digit price levels.
— Matt McCall and the InvestorPlace Research StaffAmerica's #1 Stock Picker: BUY "AMZN of Houses" [sponsor]
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Source: Investor Place