Peloton Interactive: it’s time to buy. I Project Profitability (NASDAQ:PTON)

Justin Paget

Interactive Platoon (NASDAQ: PTON) has been in a whirlwind of adventures over the past few years. As the COVID-19 pandemic skyrocketed demand for home fitness, the company saw a huge surge in demand and was barely able to follow him.

Then, after the pandemic was over, they faced the double whammy of having unrealistic comparative sales, which led to a significant year-over-year drop, as well as a price spike for the cost of their products due to inflation, which was the result of ports being closed and goods held up.

As a result of this and general market sentiment after hitting an exorbitant price of nearly $150 per share, the company’s stock has crashed and sentiment isn’t changing all that much.

But after spending a few weeks reviewing the company’s fundamentals, earnings, projections, 10,000s and the like, I think the market is underestimating what the company’s restructuring efforts will yield.

Accordingly, I think it’s time to buy some Peloton Interactive stock. Let’s dive into it.

Featured – Youza!

Over the past few months, the company’s headlines have been terrible. Several downgrades by major investment banks, margin calls on the former CEO as he maintained loans with his equity position as collateral, falling demand for products, sharp increases in the cost of materials and impediments to delivery.

And on top of all that, competitive pressures continue to mount as fitness companies move into the space and try to take advantage of the growing hybrid work model where WFH (work from home) has become more more the norm. And on top of that, as the world reopens after the pandemic, people are going back to the gym and as a result, not only are sales of Peloton machines going down, but people who used to buy Pelotons are selling them, which is turning people off. buy a new one and instead opt for a bit used for a lot less.

All of these and more have suppressed the company’s stock price.

However…

Behind the scenes: income

The most interesting thing for me is the company’s focus on its shift to subscription revenue rather than selling new fitness products. Given the rather saturated market for fitness machines, it is difficult for them to maintain their already high brand awareness and further boost it to grow their sales significantly.

Instead, they’re using the fact that so many households already have their machines to create a one-stop shop for fitness apps and workout videos and regiments. It’s just like Apple (AAPL) uses the fact that so many people already use their iPhones that they can launch multi-billion dollar businesses by introducing various services for those who own their products.

So what does it look like?

Turnover for the year is down 11% – from 4.02 billion dollars to 3.58 billion dollars. The underlying numbers are what I find fascinating, though.

Revenue from the company’s products, like revenue from the equipment they sold, fell more than 30%, from $3.2 billion to $2.2 billion. However, the company’s subscription revenue was up 60% – from $872 million to $1.3 billion.

Outstanding: The company instituted a price increase for subscriptions, from $39 per month to $44 per month, an increase of 12.8%, which was taken into account.

Revenue streams remain stable

The company has focused on generating 2 of its revenue streams by partnering with companies to sell their gear, such as their recent partnership with DICK’s Sporting Goods (DKS), as well as the previously announced deal with Amazon ( AMZN), which has already made noise with reports of better-than-expected sales ahead of the holidays.

The company’s subscription services are also getting a big boost thanks to the company’s ongoing efforts to partner with various organizations that use their subscription services as benefits for their employees, residents and others. The company added 15 new partners in July this year and I expect them to announce more as time goes on and companies look for more ways and benefits to attract and compensate employees.

As a result of these efforts – the company recently reported that the number of workouts on company equipment a increased from 460M to 540Man increase of 17.4%, even though total revenues fell by 11%.

(Source: 10-K Company)

Behind the scenes: benefits

Regarding the company’s path to profitability, I also have reason to be optimistic. The company reported a sharp rise in the cost of revenue as raw materials surged worldwide due to global inflation.

Cost of Revenue – The Real Story

The company’s cost of revenue typically hovers around 71%, but in the most recent benchmark year it jumped to 111%, resulting in a gross loss for the segment. What buoyed this segment was subscription revenue, which saw its cost of revenue drop from 37.9% to 32.3%.

This was primarily due to the company raising prices for the service, which didn’t change much for the costs associated with producing and paying royalties for fitness videos offered by trainers and others. This price increase took effect on June 1, 2022, which is why I expect the company’s gross margin to increase further in the coming year.

Restructuring costs, OMG!

In this past full year, the company has paid a ridiculous amount for various costs associated with the restructuring, which break down as follows:

$182 million in goodwill impairment, $390 million in impairment charges, $181 million in restructuring charges and $338 million in supplier settlements. This is equivalent to nearly $1.1 billion in one-time charges it made their net income look so terrible and drove much of their stock price down.

It wasn’t just restructuring costs, the company’s sales and marketing expenses increased by nearly $300 million, their general and administrative expenses increased by just over $300 million. and their research and development spending increased by more than $110 million. While much of this is likely to remain, or need to be maintained, in order to facilitate growth, not all will.

(Source: 10-K Company)

This brings us to the purchase part

So, let’s take a look at the current expectations and I’ll explain why I think they seriously underestimate the company’s ability to generate profits and improve its overall fundamentals.

The company’s revenue is expected to decline further this year:

2023 2024 2025
Sales $3.05 billion $3.41 billion $3.72 billion
Growth -14.9% +11.7% +9.32%

On these revenue growth numbers, analysts currently expect the company to report strong growth numbers in the EPS department given the aforementioned one-time charges the company has faced over the past year:

2023 2024 2025
PES $(2.22) $(1.61) $(1.62)
Growth +52.0% +27.7% -0.58%

(Source: Analyst Projections) (Brackets indicate loss per share)

While the numbers here represent a decent view of things given the current state of corporate headlines, I don’t think they reflect the reality of what I’ve been talking about throughout the article. .

My Expectations – All Pink

For these projections, I will use revenue estimates for the next 3-year period (2026 – 2029), as my investments are geared towards a long-term view. Here are those numbers based on current expectations:

2026 2027 2028
PES $4.7 billion $5.4 billion $5.3 billion
Growth +27.7% +13.1% -0.98%

Revenue

I expect that even if the company does not report overwhelming growth at their products and equipment, it will increase by about 2.5% per year, resulting in 2028 product revenue of approximately $3 billion, which includes a reversal from the post-pandemic comparison period.

When it comes to their subscription revenueI expect these numbers to increase to one faster rate of more than 15% per year, which will result in aggregate subscription revenue of approximately $3.2 billion.

This is apparent from their Projected revenue for 2029 is approximately $6.2 billion.

Revenue cost

While I don’t expect raw material costs to return to pre-pandemic levels, I believe they will return significantly and, combined with appropriate price increases on their products, I expect their cost of revenue to return to a level of around 70% for products and remain stable around 35% for their subscription revenue.

This means that their gross profit will be 900 million dollars of products and $2.24 billion from subscriptions, for a total gross profit of $3.14 billion.

Various expenses

While it’s impossible to say what the company’s leverage and overall staffing needs will be by 2029, I think we can make conservative assumptions.

Sales and marketing expenses of $1.1 billion.

General and administrative expenses of $1 billion.

Research and development expenditure of $400 million.

This translates into total operating income of $640 million, with an additional $100 million allocated to various post-operational expenses such as interest expense and currency fluctuations.

Given that the company has 322.4 million shares outstanding, assuming that would grow to around 350 million over the next 6 years, that would translate to a 2029 EPS estimate of $1.54 per share.

(Author’s note: The 1 analyst who has estimates for Peloton for 2029 is asking for EPS of $4.91. Although I don’t think that can happen, it’s remarkable)

Evaluation and conclusion

As the overall home fitness market is expected to grow by around 5% through 2030, which I believe will continue through 2030 to 2035, a 10-15x futures price to gain a multiple seems appropriate.

This presents a potential just value for the company to a range of $15.40 per share to $18.48 per share, which means that the potential average return over the next 6 years can be around 130%.

I believe this yield will far outperform the broader market and provides good exposure to a corporate turnaround that is trading at extremely low multiples to potential earnings, as well as a hedge against any form of lock in the future.

I have become bullish on Peloton Interactive and will initiate a position.

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