If you don’t have a Peloton Interactive (NASDAQ:PTON) bike at home, I’m sure you know someone who does. I don’t have one, but I’ve seen adverts plastered around social media and on TV over the past year or so. It’s a product (and a company) that has seen a sharp increase in demand, exacerbated by the pandemic. With Peloton shares up almost 100% over the past year, is there further to go and should I buy?
The backstory to Peloton
Peloton was started in 2012 and manufactures and markets treadmills and stationary bikes. It’s products are mostly designed to be used from the comfort of home instead of the gym. This is due to the technology built in to the exercise machines. Screens allow users to join a virtual class or race, and they benefit from having an instructor leading the session.
Although exercise bikes and other similar equipment aren’t a new concept, the touchscreen add-on to join live classes was. As a company, Peloton makes money from the sale of the products, along with membership of classes via the screen.
Peloton shares grew in value steadily over the past couple of years in the lead up to the pandemic outbreak. Since then, the shares have gained significantly in value. This is logical, with gyms being closed for many people, along with working from home. In this case, a Peloton bike was a way to keep fit and also to keep active during the lockdown.
Do Peloton shares have investment value?
Having a good product to market is the hallmark of a successful business. To me, Peloton ticks this box. It also ticks the box of being a growth stock, given the financial performance.
In the latest results for fiscal Q3, membership subscriptions stood at just over 5m. The payment of this, along with product sales, meant that revenue grew by 141% versus the same period in the year before.
But triple-digit growth in subscriptions and revenues wasn’t enough to stop the business registering a net loss of $8.6m for the quarter. The main costs here are the sales and marketing, along with product development.
Given the move higher in Peloton shares, it seems clear to me that investors are focusing on revenue growth instead of net profit. As a growth stock, this isn’t necessarily a bad thing. High growth in customers should eventually allow the business to break even.
Concerns about future growth
The worry for me is that Peloton shares may have already hit the peak. As the world comes out of the pandemic, I wonder how much of a hit Peloton will take. Workers return to offices, gyms reopen, lockdowns aren’t needed. Will the bikes and treadmills still see growth in demand? If not, then Peloton might struggle to become profitable at all.
Another concern is that due to rapid growth, safety and testing might not be top of the agenda. For example, recently there has been a recall of treadmills due to concern about safety. Peloton shares took a hit on this, and I think the company needs to make sure of quality control as it gets larger.
Ultimately, I won’t be buying Peloton shares any time soon. I think there are much better growth stocks to look at buying.
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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Peloton Interactive. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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