Peloton Falls As Analyst Post-IPO Quiet Period Ends

Exercise equipment maker Peloton Interactive Inc PTON traded below its IPO price in late September. On Monday, multiple analysts released their first thoughts on the company's stock.

The Analysts

MKM Partners analyst Rohit Kulkarni initiated coverage at Neutral, $24 fair value estimate.

Raymond James analyst Justin Patterson initiated coverage at Outperform, $32 price target.

UBS analyst Eric Sheridan initiated at Buy, $30 price target.

What Bulls And Bears Will Argue

Investor sentiment on Peloton is "quite bifurcated" as the potential for near-term revenue beats is balanced with risk to medium-term expectations, Kulkarni wrote in a note. Both bulls and bears do raise valid points but for the time being the stock's valuation looks "reasonable."

The bulls raise a few key points, including:

• Applying a multiple of 2.0 to 2.5 times connected fitness products revenue and 6.0 to 6.5 times subscriptions revenue, the stock would be worth $28 to $30 per share;
• Peloton boasts some of the industry leading metrics, including low net churn and high subscriber contribution margins;
• Gross margins have upside potential from growing scale and improving content costs; and
• Upside potential from the 71 million health club members in the U.S. who can cancel their gym membership or supplement their membership with an in-home workout machine.

On the other hand, bears can argue:

• Peloton would be among the first impacted by economic slowdowns;
• Growing competition;
• Rising legal "distractions"; and
• The true market potential is "limited or unclear."

3 Key Questions

Peloton's stock multiple of 3.8 times 2020 EV/S undervalues the company's growth potential and recurring revenue streams, Patterson wrote in a note. As a new stock to the public market, investors have three key questions which the analyst answers.

1. Why is Peloton different? Patterson said Peloton offers high quality content at a lower cost compared to many studio classes. Peloton also stands out by offering innovated monetization initiatives to generate revenue after selling the physical machines.
2. Will Peloton generate a profit? Peloton has a "clear path" to 20% long-term EBITDA margins after approaching break-even in fiscal 2018.
3. What about the cheaper competitors? Investors are misinformed in assuming attaching an iPad to a rival exercise machine generates a similar experience.

Data Supports The Stock

Proprietary "UBS Evidence Lab" data supports the case for being bullish on Peloton's stock, Sheridan wrote in a note. A UBS survey of around 1,000 U.S. consumers points to strong brand awareness across multiple income brackets.

Sheridan said data collected from app rankings related to Peloton indicates "strong adoption" of the digital app across the U.S. while data in the U.K. is showing "solid trends." In fact, credit card transactions and spending habits across 100,000 U.K. consumers shows spend at Peloton is "growing quickly" although off a small base.

Finally, information derived from Instagram shows Peloton has seen "significant growth" in total number of likes and views per video post.

Canaccord: Predictable Business Model

Peloton's subscription component to the business makes it easier to model revenue and offers a clearer picture of when the company can make a profit, Canaccord Genuity analyst Michael Graham said on CNBC's "Squawk Box." The company's profit profile is aided by its ability to finance investments in customer growth through the gross profit on equipment sales which comes at a 30% gross profit.

"It won't take long for Peloton to show us the economics on each subscriber are positive," the analyst said. "And I think investors will be able to see that developing."

The analyst initiated coverage of Peloton with a Buy rating and a $33 price target.

Elsewhere On The Street

• Needham initiates at Buy, $30 price target.
• Telsey Advisory Group initiates at Outperform, $29 price target.
• Cowen initiates at Outperform, $34 price target.
• SunTrust Robinson Humphrey initiates at Buy, $30 price target.
• Oppenheimer initiates at Outperform, $29 price target.
• Stifel initiates at Buy, $35 price target.
• JPMorgan initiates at Overweight, $32 price target.
• Barclays initiates at Overweight, $32 price target.
• JMP Securities initiates at Market Outperform, $33 price target.
• KeyBanc Capital Markets initiates at Overweight, $32 price target.
• Goldman Sachs initiates at Buy, $37 price target.

Price Action

Shares of Peloton were trading lower by 6.7% Monday at $21.95.