today is Aug 14, 2022

This exercise equipment manufacturer is growing revenue rapidly and selling at a discount from earlier in the year.

Key Points

  • Peloton has long-term growth prospects that are not reflected in its stock price right now.
  • The company is managing some difficulties that will slow growth in the current year.
  • Peloton stock is trading at a P/S ratio of less than half what it was trading at earlier in the year.

If you are managing your personal budget well, have your debt under control, have built up an emergency fund, and have $100 available after all that to put into the stock market, Peloton Interactive (NASDAQ:PTON) offers real potential for a good return on investment.

This interactive exercise equipment manufacturer continues to gain traction with consumers. And because Peloton is navigating some near-term challenges that have caused its stock price to fall considerably, the combination of solid long-term prospects and a discounted stock price has created an opportunity to buy-in. 

A man runs on the Peloton Tread treadmill inside a home.

Image source: Peloton Interactive.

Consumers appear to love Peloton products

Over the last several years, Peloton has rapidly grown its revenue, going from $219 million in 2017 to $4 billion in 2021. So, clearly, not all of its growth has been pandemic related. Admittedly, it did get a boost during the pandemic when many fitness centers were closed and folks were spending more time at home, but it was growing revenue even before COVID-19 disrupted the world's economy.

Part of the company's rapid growth is related to the ongoing value its products and services provide customers. Selling high-quality exercise equipment (mostly stationary bikes and treadmills with an interactive screen attached) is just the start of its interaction with users. The company also offers live and recorded exercise classes to its monthly subscribers. This provided subscribers with some of the interactive experiences they liked in their local fitness center, but from the convenience and privacy of home. How much do customers appreciate Peloton? The company received a net promoter score (a metric that measures customer experience) of 91, which is a higher score than popular brands like Apple or Netflix.

Customer appreciation for its products and services is also demonstrated by very low customer churn. As of its fourth quarter of 2021, Peloton's 12-month subscriber retention rate was 92%.

With its products and services so well-liked, management wants to offer them to as many people as possible. Peloton CEO John Foley talked about market expansion in an August earnings conference call: "We believe that we are still in the first inning of connected fitness industry growth. ... We will continue to expand our geographic footprint while leveraging additional distribution channels like commercial and corporate wellness. And we will continue to drive supply chain efficiencies via a focused hardware portfolio."

To help fulfill growing demand and to better manage supply chain costs and challenges, Peloton completed its $420 million purchase of exercise equipment manufacturer Precor in April. Further, Peloton is building a new manufacturing facility (to be completed in 2023) that will add even more capacity. Management is not only expecting but preparing for an increase in sales.

Why did Peloton's stock fall?

Peloton's stock price is down about 42.8% year to date. The fall results from several factors, including a well-publicized product recall earlier in the year and supply chain bottlenecks causing an increase in shipping, material, and labor costs. Making matters worse, management gave revenue guidance for fiscal 2022 that was significantly below recent years' growth rates.

A chart showing Peloton's forward price to sales ratio.

Data by YCharts.

The company benefited from a surge at the pandemic's onset and is now grappling with adversity. Fortunately, the price drop is the result of short-term problems that should resolve as world economies progress in their battle against COVID-19. The stock is currently trading at a forward-price-to-sales ratio of 4.75, less than half what it was earlier in the year. For the reasons outlined above, Peloton stock is a bargain and would make for an excellent place to invest $100 right now. 

Should you invest $1,000 in Peloton Interactive, Inc. right now?

Before you consider Peloton Interactive, Inc., you'll want to hear this.

Our award-winning analyst team just revealed what they believe are the 10 best stocks for investors to buy right now... and Peloton Interactive, Inc. wasn't one of them.

The online investing service they've run for nearly two decades, Motley Fool Stock Advisor, has beaten the stock market by over 4X.* And right now, they think there are 10 stocks that are better buys.

See the 10 stocks

*Stock Advisor returns as of October 20, 2021

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Parkev Tatevosian owns shares of Apple and Peloton Interactive. The Motley Fool owns shares of and recommends Apple, Netflix, and Peloton Interactive. 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.