Peloton's market cap just reached a record $32 billion — but a new survey and Wall Street's solo bearish analyst warn its valuation should be less than half of that. Here's why investors should be cautious.

  • BMO Capital Markets’ equity analyst, Simeon Siegel, leverages data provided at Peloton’s investor day to provide a bearish case on Peloton’s market size and consumer interest during a time when interest should be at its peak.
  • Siegel said Peloton is “pricing for perfection” without taking into account the growing number of competitors, including large technology companies.
  • In addition to Siegel’s case, a new survey from CivicScience was released in the same week finding that 67% of respondents were disinterested in Peloton's offerings, whereas 28% hadn’t heard of the product.
  • “I think that the reality here is Peloton the stock has taken on a life of its own that is driven by a view that the audience is limitless,” Siegel said.
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Peloton Interactive Inc (PTON), the luxury home fitness equipment provider, is one of Wall Street's darling stocks of the pandemic. Peloton's ability to provide connected fitness equipment, such as bikes and treadmills, to gym goers in search of alternative workout options during the pandemic has sent the stock soaring.

For its fourth quarter, Peloton announced stellar financial results demonstrating significant growth; connected fitness subscriptions grew 333% and revenue grew 172%.

Yet, one Wall Street analyst remains bearish on Peloton.

According to TipRanks, Siegel was the only analyst out of 23 Wall Street analysts to rate the stock a sell or underperform following  the fourth quarter results. Both Evercore ISI and Stifel set a target price of $120, a significant increase from previous target prices, $62 and $72 respectively.

However, BMO Capital Markets' Simeon Siegel went against the majority, slapping another underperform rating on the stock and setting a target price of $33. 

As a comparison point, Peloton's stock closed at $111.31 on Tuesday, having hit a record $113.87 earlier in the day. When Peloton listed on the NASDAQ on September 26 2019, it closed at $25.76.

Despite Siegel's stock rating, he is, in fact, a big believer in the Peloton product.

"I'm a huge user of the product," Siegel said. "I am a big advocate of the company. I think the reality here is from a stock perspective, this is pricing in more than perfection."

Interest in the Peloton appears to be stagnant

Siegel's concern is around Peloton's expected market size and the growing number of viable competitors in the marketplace.

"Peloton, the stock, has taken on a life of its own that is driven by a view that the audience is limitless," Siegel said.

On September 14, a new survey was released from strategic insight service, CivicScience, where they interviewed 3,298 individuals from the US about Peloton. CivicScience found 67% of respondents were disinterested in Peloton products whereas 28% hadn't heard of the product.

Bullish investors expect the market size for home fitness grow exponentially. Many investors also expected an uptick in interest in connected fitness from fitness enthusiasts during the pandemic when limited fitness options were available. 

However, CivicScience's September survey suggests interest in luxury home fitness hasn't changed significantly amid the pandemic, though it is worth noting the survey's small sample size.

Based on data provided at Peloton's investor and analyst conference, Siegel echoed similar sentiments about consumer interest in Peloton products.

Siegel discovered there was a 0% increase in interest in learning about a Peloton product without seeing the price. This suggests the pandemic has not lifted the desire to own the product, Siegel said, in the September 15 research note.

Peloton also provided updated data on its Total Addressable Market and Serviceable Addressable Market, which was last set pre-IPO. Peloton said it increased its SAM from 14 million to 20 million people.

However Siegel identified the increase for the connected fitness part of the business was only 1 million people and the rest of the increase was related to digital subscriptions.

Connected fitness subscriptions is what drives recurring revenues, Siegel said.

"COVID was the perfect opportunity to gain customers," Siegel said. "Not only because everyone was at home, but also because the landscape of competition was so much less. The reality is that will continue to grow, so the competitive landscape will only expand."

The market cap doesn't make sense

What will be key for Peloton is discovering the right addressable market size, Siegel said. He sees the home fitness category belonging to multiple players and believes that the market in general is smaller than bulls expect, based on his findings.

Around 500,000 people purchased a connected fitness product in the last six months, according to Siegel's note. He said the purchase amount was impressive but just not as large as bulls expected. He also acknowledged that some potential customers may have abandoned their cart because of long wait times for Peloton products during the pandemic.

But to change Siegel's mind on the sell rating, he would need to see an even bigger Total Addressable Market than what bulls expect. Planet Fitness (PLNT), which he notes has a different business model from Peloton, has 15 million members and a market capitalization of around $5 billion. Whereas Peloton currently has around 1 million connected fitness members and a market capitalization of around $32 billion. 

Peloton would need to secure the same number of members as Planet Fitness to meet its current SAM, and at the same time convince the members to pay two to three times more than a Planet Fitness membership, in addition to the initial outlay for the equipment. The most basic Peloton bike package costs $1,895 and and then the monthly membership is $39; a Planet Fitness membership can be as low as $10.

If Peloton was able to do this, Siegel said Peloton could justify a market capitalization of between $10 billion to $15 billion.

Competition is heating up

But this is pricing for perfection, Siegel said, because this analysis does not take into account the rise of competitors in this space, especially from larger technology companies, such as Apple.

It  was recently suggested that Amazon would be releasing a connected fitness bike for Prime members in partnership with Echelon. But hours after Echelon announced this, Amazon said this was not a formal partnership, cancelled all sales and asked Echelon to remove any association with Amazon.

"Thus far, peloton has been competing against meaningfully less funded startups. Going forward those startups now have greater funding," Siegel said. "But on top of that, whether Amazon decides to enter the game or not, we've seen Apple coincidentally announce their own entrance into the fitness market simultaneously with Peloton Bike+. So FAANG size competitors have already started, the question is where it goes from here."

In terms of alternatives for investors who believe in the home fitness trend, there are few to invest in at the moment. Many are still in the private market such as Zwift and Lululemon's Mirror. 

Siegel, believe this is in part why Peloton is trading at a premium. He suggests investors could also look at Nautilus Inc (NLS) for a home fitness investment alternative, though he does not cover this company.

The only bear among the bulls

Some investors might wonder why Siegel is the only bear amongst the bulls on Peloton. He believes there has been less focus on the numbers.

"The themes these days have been stronger than nuance; the themes have been stronger than numbers," Siegel said. "That only lasts for so long. But the reality is I understand that the status quo works in Peloton's favour right now."

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