Peloton Spins Into View With Perfect Timing

Jon Markman

Fitness company Peloton Interactive ((PTON) -Get Report) has a super-hot stock and managers have a plan to make its even hotter. Investors should get ready to buy the next pullback.

John Foley, chief executive officer, on Tuesday told analysts to expect many more new products, services, and he even teased the goal of 100 million paying Peloton subscribers, a 100-fold increase from current levels.

The optimism is not as crazy as it seems.

The New York-based company is in the right place at the right time, with the right product. The global pandemic forced the closure of gyms worldwide. As people retreated to their homes, Peloton was ready with a best-in-class, Internet-connected exercise bicycle, a squadron of attractive, smart, inspirational human trainers and an ecommerce platform that made getting the gear easy. The rest was clever advertising and word of mouth.

Peloton owners are cult-like, in the best possible way for a business. Buyers are obsessed, complete with tattoos, fanatic social media posts and testimonials. The company’s official Facebook page has 673,000 members, and counting. I’ve been a customer for a year, and can assure you the hype is well placed – great product, great service. It just works.

It’s easy to see the appeal. Although the equipment is pricey -- a good bike will cost $1,895 plus $250 for delivery -- a $39 monthly subscription gives users unlimited access to high quality live and on-demand interactive spin classes, all in the comfort of their own homes. The platform also offers yoga, mediation, boot camp, outdoor running and weight workouts in the same effervescent style.

Peloton provides the best of the active lifestyle experience minus all of the stuff gym-goers hate, like odors, obnoxious music, communal changerooms and parking fees.

There is also the matter of the instruction and interaction. Peloton managers made the conscious choice from the beginning to build the brand around their instructors. Some of the most popular trainers have become brands onto themselves, with vibrant social media presences.

For example, Robin Arzon, a head instructor, has 563,000 Instagram followers and fledgling YouTube channel. The exposure, and her relentless positive attitude landed the ex-lawyer and ultra-marathoner a lucrative social media ambassador gig with Adidas.

Her celebrity, in a strange way helps Peloton even more. Arzon’s motivational shout-outs to first time riders and members moving up her class leaderboard, creates a sense of intimacy. Building a core Peloton experience is the cornerstone on Foley’s plan to get to 100 million paid subscribers.

He’s also keenly focused on rolling up fragmented segments of the home fitness market. Foley noted Tuesday during his investor day presentation that there are 35 million households with a treadmill. Most are in the garage or basement collecting dust because they’re boring. Tens of millions of these homes could be Peloton homes with the right product at the correct price point, delivered through the appropriate digital channel.

So the New York company is busy developing new gear at lower price points, and figuring out ways to sell refurbished equipment, and creatively finance new bikes and treadmills.

Tread, its yet to be released treadmill, will cost $2,495, versus the original Tread+, that retails for $4,295. And the company is taking older bikes as trade-in for the upcoming Bike+. Foley says re-selling the used equipment will bring more people into the Peloton community.

Growing the list of digital channels will help, too. During the past 12 months, the Peloton application has been made available on Amazon Fire TV, Roku, Apple TV and Android TV.

Meanwhile Peloton corporate managers are looking to expand the business into new geographies from the current concentration in United States, Canada, the United Kingdom and Germany. Operations in South America, Asia and greater Europe offer a natural fit. The plan echoes the successful efforts of Starbucks over the past two decades, with an aspirational product sold in a classy way that makes customers feel good about themselves and their place in the universe.

Business is terrific now, though.

Fourth quarter financial results released last week showed sales growth of 172%, to $607 million. Net income reached $89 million, the first quarterly profit in the history of the company, three full years ahead of schedule. Managers are modelling for sales between $720 million to $730 million in Q1, a 218% year-over-year increase, with about 1.32 million subscribers, up 135%.

I first recommended the stock at $19.72 on March 15 and it’s up 334% since. The size of the opportunity is pushing shares into the stratosphere. Momentum could slow following positive COVID vaccine news.

Investors should buy that weakness.

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