Peloton (PTON) - Get Report on Monday was upgraded to buy from neutral by an MKM Partners analyst, who said the recent selloff in the connected-fitness company's stock has created an attractive buying opportunity.
Shares of the New York company at last check were rising 8.5% at $114.05.
Analyst Rohit Kulkarni, who affirmed his $130 price target, wrote a research note titled "Changing Gears as We Expect Pandemic's Poster Child to Keep on Pedaling."
He noted that since Feb. 4 Peloton shares are down about 34%, compared with the S&P 500 trading roughly flat.
The company saw demand for its products and services surge as the coronavirus pandemic shutdown kept fitness buffs and athletes stuck at home.
Peloton had warned earlier this year that it couldn't keep up with demand and warned that profit would be squeezed in the near term. The company had received a low customer rating with the Better Business Bureau over the issue, according to a New York Times story in January.
Kulkarni said that Peloton recently said that it was investing $100 million in air freight and expedited ocean freight over the next six months.
"While this impacts near-term gross margins, ... such initiatives are a positive indicator of the company’s focus on consumer satisfaction," the analyst said.
"Over the past four weeks, we think such measures have already started to show positive results — based on our personal experience as well as tracking negative citations on Better Business Bureau."
In addition, the analyst cited an intangible "but significant value of a growing cult (or network) and associated addiction (network effects)."
"[The] combined value of Peloton's investments in instructors, music/media, and social features is greater than just looking at the member churn rate or workouts per member," Kulkarni said.
"We believe the value of the network is greater than the sum of the individual parts, and it continues to grow at a greater clip than the growth in the size of the network."
The risk, the analyst continued, "is the uncertain outlook beyond summer 2021 (i.e. what happens to near-term consumer behavior after mass vaccination).
["[And] we think Peloton will continue to trade at a discount to its recently reported growth rate due to this uncertainty."
In February, the company topped analysts' second-quarter estimates, reporting revenue more than doubled -- up 128% -- from a year earlier to $1.06 billion. The company swung to earnings of 18 cents a share from a net loss in the year-earlier quarter.