The stellar run for home fitness in 2020 is making many investors ask is Peloton (NASDAQ: PTON) stock bullish for 2021? The virus elevated Peloton to one of the highest points in the online fitness arena. However, the slow transition back to regular gym life is forcing Peloton to adapt its business model. Will Peloton’s 2021 plan and beyond succeed? To answer the value investment question, we must look at seven key areas. These include Peloton’s financials, analyst ratings, options activity, future catalysts, the management, and the bearish outlook.
Table of contents 1. What do the bulls see for 2021? 2. Do the bears have strong rebuttals? 3. So ... is Peloton stock bullish for 2021?
The 2021 bull argument
Peloton’s financials are shaping up to be promising for 2021 and beyond. The current financial situation is one of unprofitability but huge upside in revenue and free cash flow. For example, Peloton remained unprofitable for 2020 but posted $600 million in revenue for Q3, a 133% increase YoY. However, CEO John Foley points out that impressive revenue growth is not new as Peloton grew revenue by 100% YoY for the past six years. Despite Peloton’s consistency, their blowout revenue results during 2020 saw 25 analysts raise their revenue forecasts to $3.6 billion for 2021. Why is this revenue-raising significant? If Peloton grow into their XL revenue shoes, then profitability could be on the table. Hence, the incredibly bullish sentiment from analysts when discussing Peloton’s 2021 financials.
Management and future catalysts
Peloton’s management, more specifically CEO John Foley, remains bullish on the company’s future. The three talking points from management include the shift in the gym industry, the current demand-supply imbalance, and the growing traction for a rent-a-bike style service.
Everything is at home, from work to entertainment to food, and soon fitness will join the home party. Peloton looks to capture and create the emerging market. John Foley drives the point home, “If you can have a better workout experience with fantastic instructors, a gamified network, and a collaborative community why wouldn’t you workout at home”. Peloton will look to assert their brand as the online fitness captain over the coming years. Despite COVID-19 causing a demand-supply imbalance for the fitness industry, Peloton, according to John Foley, “outpaced the demand” by working around the clock. The recent transition back to the gym should give Peloton’s supply chain some breathing space. In turn allowing PTON to service the current demand, while expanding their supply chain at a more organic rate.
Moreover, the last talking point is Peloton’s transition from a one -time purchase to a subscription pricing model. John Foley champions the subscription model as Peloton will access price-conscious customers, ultimately expanding their market share in the years to come. The subscription service should see Peloton capture the pay as you go mindset of millennials and future generations. Buy now pay later, renting cars, and entertainment services like Netflix and Spotify prove this point. Peloton is already experiencing growth in their subscription model. For example, in Q4 2020, subscriptions were used 24 times a month. Contrast that to 12 times a month in Q4 2019, and the growth is starting to come through.
For most fundamental investors, catalysts are at the centre of the investment decision. Peloton’s catalysts, much like Apple, are earnings and new product launches. The Peloton Bike + (featured below) is rolling out at the beginning of 2021. To say the features are revolutionary would be an understatement. The swivel screen, inbuilt speaker, and machine communication cater to the stay at home style. Like Apple, Peloton will permanently discount its older models, which should reel in more price-conscious customers. Therefore, the Peloton bike + is a significant catalyst as it should contribute to more robust earnings during 2021.
Peloton options are currently indicating a bullish sentiment for 2021 and beyond. Investors anticipate a healthy rise from now to the middle of October 2020 as volumes for $100,$105, and $110 calls are 4760, 1435, and 1514 respectively. When comparing the volume to the corresponding put strikes, the results are 842, 126, and 88, ultimately revealing the optimistic undertone. However, the bullish sentiment seems to be carrying through to 2021. For example, volume on out the money calls between $100 – $140 is significantly higher than the in money puts for the same strikes. If investors would like to investigate the options activity for PTON during 2021,2022, and 2023, then click here.
Hedge funds/smart money
When pouring through forum discussions, articles, and videos investors can often be left unsure of the sentiment. Examining the Peloton smart money is like a fast pass to know whether the PTON retail bulls are bodacious or in line with the institutional investors. According to Insider Monkey, “Peloton Interactive was in 50 hedge funds’ portfolios at the end of June and the all time-high for this statistics is 48.” The Insider Monkey data allows investors to conclude that more hedge funds are increasingly taking positions in Peloton. There was only 28 hedge funds in PTON back in Q3 2019, further driving home the argument that the smart-money is building up overtime. Overall, the increase in the number of hedge funds taking long positions suggests the retailers 2021 bullish predictions are somewhat accurate.
The 2021 bear argument
Peloton’s 2021 and beyond financial fairy-tale is not perfect. First, the company is unprofitable. Second, investors should ask, is the record revenues unsustainable? While the fitness giant dominated the stay at home shift, people returning to the gym could cause a pullback in Peloton’s earnings. However, it seems the positive financial outlook and digital fitness’s future outweighs the negative earnings and unsustainability issue.
Despite management’s optimism, John Foley does recognise that Peloton must face challenges now and in the future. First, the COVID-19 demand spike alerted Peloton that they must adapt their supply chain to thrive off the stay home fitness market. If left unchecked, Peloton could lose market share. Second, the meteoric 2020 growth story is likely unsustainable. Consequently, Q2 of 2021 FY could look less successful than the over-inflated 2020 sales. Explaining how the potentially lower revenues still signify growth might be a concern in the imminent future.
Peloton’s blowout 2020 revenue is causing options projections to be incredibly bullish. While the 2021 and beyond outlook looks promising, the imminent future could entertain a sell-off. Because the rapid share price growth and the shift back to public gyms could cause investors to take profits. Thus, the short-term options activity could be overly ambitious.
So… Is Peloton stock bullish for 2021?
Before I begin, I remind our viewers that this is not financial advice. Instead, the content is investment commentary from extensive research.
Overall, Peloton’s 2021 and beyond growth story is one to investigate further. It seems the pleasing financials are here to stay as profitability is on the table for 2021. Management, especially John Foley, are confident in success. Because of Peloton’s plan to cornerstone the home fitness market, their ability to keep up with rampant demand, and the popularity in their subscription price model. Moreover, the earnings and product catalysts are promising for 2021. Lastly, the smart money and options activity confirms the 2021-2025 bullish argument. Yes, there are valid rebuttals in the areas of financials, options, and supply chains. However, it seems there are more bulls than bears in the Peloton 2021 tug of war.
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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Senior Manager of YIG.