Why This Peloton Analyst Sees Over 35% Upside In Shares

Shares of exercise equipment company Peloton Interactive, Inc. PTON have pulled back since the highs reached in January, making them attractive, according to an analyst at Loop Capital Markets.

The Peloton Analyst: Analyst Daniel Adam initiated coverage of Peloton shares with a Buy rating and a $140 price target, roughly 36% upside from current levels.

The Peloton Thesis: The weakness in Peloton shares is largely due to voluntary recalls of the Tread and Tread+ as well as negative press around the safety of these products, analyst Adam said in a note,

The impact from the recalls, according to the analyst, is likely to be short-lived and the company's guidance has baked in an excessive amount of conservatism.

Related Link: Peloton Analysts Bullish After Earnings Beat: 'Recalls Not As Bad As Feared'

Peloton has consistently "under-promised and over-delivered," with an average quarterly revenue beat of 11% and EBITDA about three times better than guidance, Adam noted.

Peloton has leeway to easily raise subscription prices, given its single-user digital membership at $12.99 per month is lower than SoulCycle parent Equinox app's $39 per month pricing, the analyst said. This pricing power potential, the analyst said, is underappreciated by investors.

Additionally, given the company's history of launching new products, innovation could drive upside to Loop's numbers and the Street's, Adam said.

Loop also sees significant margin expansion opportunities, as higher-margin subscription growth outpaces connected fitness products.

"Given inherently higher margins for subscriptions (~74.6% gross margin in FY23E) than those of CF products (~30.5% in FY23E), we expect company-wide margins to expand significantly in the coming years," the firm said in the note.

PTON Price Action: At publication Monday, Peloton shares were up 4.40% at $107.54.

Related Link: Why Momentum Advisors CIO Expects Peloton's Stock To 'Rebound Substantially'

(Photo: Peloton)