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Where Will Peloton Interactive Be in 1 Year?

Home fitness stocks really got a workout during the COVID-19 pandemic, and there's a good chance they can keep that pace going after life returns to normal and people are able to go back to the gym.

Peloton Interactive (NASDAQ: PTON) was one of the main beneficiaries of the lockdowns and the resulting need to maintain fitness at home. While its growth trajectory may not look the same in the future, it has spied several new avenues for expansion that should serve investors well.

Image source: Peloton Interactive.

Working up a sweat

Peloton is becoming more than just a manufacturer of high-end home fitness equipment. Although its treadmill and stationary bike will likely remain the cornerstones of its business, it's entering new verticals that should neatly supplement its core operations.

The new partnership with Adidas (OTC: ADDYY) for a line of Adidas x Peloton workout apparel is a smart brand extension that has the potential to work well with its 16.7 million connected fitness subscribers.

The clothing line, which consists mostly of running shoes, sweatshirts, T-shirts, and hoodies, comes with cross-branded fitness classes as well that launched on Peloton's Bike and Bike+ as well as its app. And exclusive content between the two is being made for Adidas' Creators Club, the athletic wear maker's member loyalty program.

Room to expand

Similarly, Peloton's acquisition of Precor should give it entry into the commercial market. That could result in Peloton equipment making its way into hotels, spas, and fitness clubs that have typically been closed off to the home gym equipment maker.

The timing works out well, too, because most workers won't be literally phoning it in anymore now that a coronavirus vaccine is becoming widely available. Returning to the office means more business travel, and the travel and tourism industry that was among those devastated by the outbreak will begin seeing new business once more.

U.S. gyms alone are an opportunity 10 times larger than the $4 billion at-home fitness market. Whether gyms will want to bolster what is ostensibly a competitor remains to be seen, but of more immediate value may be the extra capacity Precor facilities give Peloton to meet the overflow of demand it continues to experience.

While the worst of the order backlog that caused shipments to fall weeks if not months behind schedule seems to be behind the manufacturer, Peloton has not yet caught up. It risks inflicting damage to its reputation and losing sales to rivals with the continued delays.

A tech tie-in

Peloton also made three acquisitions that head off in unique directions while remaining tied to its core business.

Its purchase of businesses in the fields of artificial intelligence, digital voice assistants, and wearable devices presents brand new fields that can enhance its current crop of offerings.

Smartwatches that integrate with the Peloton app to nudge a wearer to exercise or that read biometrics and suggest new routines to step up an exercise program are an avenue to pursue.

The purchases indicate a management team that's not stuck in a single lane but has new ideas for the company's future.

The real problem with Peloton stock

However, valuation is the key consideration for Peloton investors today. Even though shares are down 34% from their recent high and at least one analyst views it as an "attractive" buying opportunity, there's no doubt the stock's valuation remains very elevated.

It moved into profitability this year, which helps drive price-to-earnings ratios skyward, but it still trades at over 10 times the sales it produces and over 50 times the free cash flow (FCF) it generates. Peloton is not a cheap stock.

Certainly an argument could be made that the industry leader deserves a premium valuation, but rival Nautilus (NYSE: NLS) arguably gives investors growth potential that's almost as good. Nautilus equipment is much more reasonably priced, giving it a much larger market to penetrate.

Moreover, Nautilus goes for 8 times trailing and estimated earnings, a fraction of its sales and earnings growth rate, and just 8 times FCF, a bargain-basement valuation.

Peloton Interactive is nicely positioned between inflection points for consumer demand and new growth opportunities, but investors should consider waiting for a better price point, which may present itself between this year and next.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Peloton Interactive. The Motley Fool has a disclosure policy.


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