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Is Peloton a Smart Buy in 2022?

After advancing 434% in 2020 thanks to surging pandemic-fueled demand, Peloton (NASDAQ: PTON) shares fell precipitously last year, losing 76% of their value. In 2021, the business dealt with delivery delays, treadmill safety issues, and two straight quarters of dramatically slowing revenue growth. Plus, there's no shortage of competition from other at-home fitness equipment makers, as well as from traditional brick-and-mortar gyms.

With all the negativity surrounding the stock right now, does Peloton make for a worthy investment in 2022?

Image source: Peloton.

Pedaling backwards

It seems like the bad news for Peloton keeps coming. Most recently, it was reported that Peloton is stopping production of its connected-fitness equipment. This includes the Bike, Bike+, and Tread (the Tread+ was already halted). The management team seriously overestimated demand for Peloton's high-priced equipment as economies started opening back up.

Last August, Peloton announced that it was going to drop the price of its flagship bike by $400 to $1,495 in order to boost demand. The hope was to open up the addressable market to less-affluent consumers who might be more cost-conscious. "As expected, our original bike price reduction created a step shift in demand, helping to broaden our demographic mix and expand our market opportunity," co-founder and CEO John Foley highlighted on the fiscal 2022 Q1 earnings call.

Those customer savings were short-lived, however. Beginning on Jan. 31, the business will start charging delivery and setup fees of $250 and $350 for its bikes and treadmills, respectively. These services were previously offered free of charge. Demand is already taking a hit. Adding this extra cost on top will pressure consumer interest even more.

Additionally, the company has hired consulting firm McKinsey to explore cost-cutting measures and ways to streamline operations. Peloton is going through some major changes. This is a completely different situation than just 18 months ago.

Peloton's positive attributes

Let's turn the discussion to Peloton's favorable traits, of which there are quite a few. The company is still the top dog in the at-home fitness industry. A competitor like Nautilus had been selling exercise equipment for decades before Peloton sold its first bike, but the latter became a household name because of its seamless hardware design, integrated software, and community element.

Peloton's fantastic content is starting to look like its true competitive strength. The company's instructors have celebrity-like status in the fitness world. And partnerships with a superstar like Beyonce, as well as a curated Peloton playlist on Spotify, exemplify how important music is to engage with customers. These features add an element of excitement to workout classes.

You could make a legitimate argument that Peloton's subscription business alone, a segment that generated $1 billion in trailing-12-month revenue (which increased 94% year over year in the most recent quarter) and that carries a 66.7% gross margin, could be worth more than the total market cap of $9 billion.

Having a total of 6.2 million members (as of Sept. 30) gives Peloton access to a massive (and growing) treasure trove of data that can be used to continuously improve the user experience. This strategy is what supported Netflix's rise to the top of the entertainment world. Netflix trades at a price-to-sales ratio of 6, while Peloton trades at a multiple of just 2. And the streaming stock doesn't have a profitable hardware business.

Furthermore, Peloton's expansion opportunities can't be ignored. New products, like the Guide, an artificial-intelligence-enabled device for strength training, and a possible rowing machine, can quickly spur demand. The company spent $97.7 million on research and development in the latest quarter. For comparison's sake, Nautilus' entire market cap is $155 million. In addition to capitalizing on this big budget, penetrating international markets can also be a boon for the business.

We also can't forget the possibility of a potential acquirer coming in and scooping up Peloton. I previously wrote about Apple making a move.

Is there a brighter future?

Peloton is a category leader, pioneering the connected at-home fitness trend. And it's still a very young company, having been founded in 2012. The business is definitely going through some growing pains, something Wall Street clearly frowns upon.

At a $9 billion market cap, Peloton could potentially make for a worthwhile investment. It would certainly be a stressful stock to buy because of the market's extraordinary pessimism right now. But you can see that the company does have some favorable characteristics.

Management must show signs of significant improvement in Peloton's inventory management, pricing strategy, and cost structure in 2022. Of course, product demand needs to be there, too. Then shares could prove to be incredibly appealing today.

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Neil Patel owns Apple and Netflix. The Motley Fool owns and recommends Apple, Netflix, Peloton Interactive, and Spotify Technology. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.


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