Figure 1. Interactive Peloton Stock Price Chart

Peloton supplies high-end stationary bikes and treadmills. A monthly household subscription, which costs $39, transforms the equipment into an interactive fitness platform. Subscribers access live classes to fit their schedule, activity tracking, leaderboard competitions, and connection with other members. No Peloton hardware is required to subscribe to the Peloton app for $12.99 per month, but the features are less extensive.

Pelotons bikes and treadmills cost anywhere between $1,745 and $2,845, including delivery and set-up. This also includes a recent price hike, which the company blamed on inflation and supply-chain issues. At those costs, I was sceptical. However, during 2020, as gyms closed, Peloton bikes flew off the shelves. Revenues doubled in the 2020 fiscal year and more than doubled the year after.

Table 1. Selected annual income statement items (in USD) and ratios for Peloton.

Source: Peloton 10-K forms

As a percentage of revenue, operating and net income losses narrowed in 2021. Peloton continued to add subscriptions throughout the 2021 fiscal year, bettering its 2020 performance on this metric. It appears existing customers are sticking with the monthly subscription even as gyms reopen. Peloton products are expensive. That might motivate people to keep using them. Peloton has been clever with its marketing in placing bikes and treadmills as centrepieces in the home. They are high-quality items that people want to display and not stick in the garage.

Post-pandemic Peloton

Choosing Peloton when other options are unavailable is one thing. The company is marketing to the converted. When gyms are open, a different strategy has to be employed. It would appear that Peloton management failed to notice this. A scathing presentation by Blackwells Capital lays the blame at the door of Peloton’s CEO. Looking at rolling trailing 12-month income statements reveals that Peloton’s financial performance started to deteriorate in early 2021. People spent less time and money on Pelton’s equipment as the world began to open up. However, the company was forecasting increasing demand, and inventories were building even as growth rates slowed. There were also product recalls after reports of serious incidents caused by Peloton equipment, which the company handled poorly.

Table 2. Rolling Trailing 12-Month Income Statements for Peloton (all figures in millions of USD)

Source: Peloton 10-Q forms

Last week, Peloton’s under-fire CEO was replaced, although he will remain as executive chairman. At the same time, the company rolled back its forecasts for the 2022 fiscal year and laid off 2,800 staff, which is consistent with an outfit that had scaled its operations and expectations too far.

Existing shareholders seem satisfied with the change of direction as the share price rose to 25% in response. Will it rise more? Well, Amazon and Nike are suggested to be interested in acquiring the business. Any offer would likely move the Peloton stock price higher. Aside from an acquisition, the company and its new CEO will have to get revenue growing again. After all, Peloton is priced for growth, so investors will want to see it.

So what’s going on here? And should I buy the beaten-down growth stock now to capitalise on the upward momentum?

Why Peloton’s share price is soaring

In my view, there are a number of reasons Peloton’s share price has spiked recently. One is that there has been a change of CEO.

On 8 February, the company announced that Barry McCarthy, who has held senior leadership roles at Spotify and Netflix, has been appointed CEO and president, effective 9 February.

Peloton co-founder John Foley, who was previously the CEO, will now become executive chair. Investors were happy with the decision to replace Foley as CEO, as he has made a number of sub-optimal decisions in relation to product, pricing, demand, and capital allocation in the recent past.

Another reason Peloton’s share price has surged is that the company announced that it would be taking a series of steps to position the business for long-term growth and establish a clear path to consistent profitability.

These steps will see it cut 2,800 jobs and reduce its planned capital expenditures in 2022 by approximately $150m. It believes its actions can deliver $800m in annual run-rate cost savings.

Takeover speculation has also fueled the share price recently. In the last week, there’s been rumours that Peloton could be acquired by a larger company. Apple and Amazon are two companies that have been mentioned.

I personally don’t think Apple would be interested in Peloton. However, a deal could work for Amazon. It has the logistics network in place to deliver the exercise equipment, and could stream the content through Prime.

Finally, I believe we’ve seen a bit of a ‘short squeeze’ over the last week. Data from Nasdaq shows that in January, short interest here was above 10%. I think a bit of buying from investors has forced some of the short sellers to close their positions, which has pushed the share price higher.

Should I buy Peloton stock now?

As for whether I’d buy Peloton stock for my portfolio today, I’m not convinced the risk/reward proposition is favourable at present.

I do think there’s a market for Peloton’s premium exercise products. And I believe the company is heading in the right direction now it has replaced its CEO and announced cost-saving measures.

However, to my mind, there’s a lot of uncertainty in relation to future growth. Ultimately, it’s hard to know what kind of growth Peloton is capable of generating in a post-Covid world.

Another concern for me is competition. Not only is Peloton up against other similar work-out-from-home products, such as Lululemon’s Mirror, but it is also facing competition from gyms and exercise studios now that the world has reopened.

Given the uncertainty over future growth, I’m going to leave Peloton stock on my watchlist for now. All things considered, I think there are better stocks to buy at the moment.

Reasons to buy

Despite having been a Peloton sceptic for a long time, I don’t think this company is without merit. 

Its flagship bikes are undeniably beautiful bits of kit. Like any other premium brand, I can still see some people wanting one for the image it projects. That’s regardless of how often they actually intend to use it. And a few businesses may consider that to be worth (quite a bit) more than the $10bn valuation it now trades for. 

There’s also little doubt in my mind that the industry is only likely to go from strength to strength in the years ahead. The evolution of smart health-related tech shows no signs of slowing. The influence of social media will surely play a role in pushing more people to improve their fitness too. 

The idea of a heavyweight like Amazon or Nike acquiring the company could also attract other potential suitors to the fray. Apple‘s name was bandied about when Peloton stock first began its awful slide. Having seen it now tumble 80% in one year (even after yesterday’s 21% rise), the Cupertino-based business could now throw its cap into the ring.  

Reasons to steer clear

But let’s come back down to earth for a second. 

One of my biggest gripes with Peloton as an investment is that, aside from aesthetics, I’m not seeing much to separate it from the competition. There’s no ‘moat’ here, to coin a term from Warren Buffett. The fact that Peloton has now cut the price of its equipment on multiple occasions only serves to confirm this.

It’s also a sign that the trend for more people exercising at home may be coming to an end at the same time as the pandemic. Gyms bring an element of socialisation to fitness that staring into a screen can’t. That will be the case no matter how interactive Peloton tries to make its classes.

On top of this, Peloton has already faced a lot of negative publicity as a listed company. These have ranged from the highly serious (product recalls following injuries to pets and children) to the frankly ludicrous (TV shows featuring characters having heart attacks while using its machines). That’s hardly what I like to see as a prospective investor.

So, will I buy Peloton stock today? 

It will be fascinating to see how all this plays out. Amazon clearly has sufficient clout to revitalise the company whereas Nike has arguably better knowledge of the industry. 

Then again, yesterday’s initial excitement could easily dissipate just as soon as it arrived. After all, there’s no guarantee of a bid from either business materialising. In such a scenario, I’d be left holding stock in a company with dwindling revenue and a challenging outlook. That smacks of gambling to me. And that’s not the Foolish way.

I won’t be buying Peloton stock. Instead, I’m inclined to keep my powder dry for other opportunities.

If I were to buy a sold-off share, it would probably be this one. 

Takeover news

Over the weekend, it was reported that Nike and Amazon were separately evaluating bids for Peloton. Further, there’s also a high possibility of other buyers, including Apple and other large private equity firms. Despite this, it’s all at a preliminary stage and there haven’t been any official talks with Peloton yet. In addition, an Amazon spokesperson declined to comment on “rumours and speculation”.

Any takeover news is a good sign for the company, however for two reasons. Firstly, a takeover will nearly always be at a premium to the current share price, meaning that the shares are likely to soar after any official offer. This is why Peloton stock is up more than 20% today. Secondly, this interest demonstrates that the Peloton share price may be too low. So even if there’s no takeover, this is still a positive sign that the sell-off may have been overdone.

Yet there are some significant hurdles before a deal can be done. For one, the company has a dual-class shareholder structure, which means that co-founder John Foley has majority voting rights on all big decisions, including takeovers. If he doesn’t want a takeover to happen, other shareholders can’t force him.

The future for Peloton stock

After a series of excellent results during the pandemic, revenues have started to decline recently. In fact, in the first quarter of FY22, Peloton tooj in ‘only’ $805m. A slightly more encouraging $1.14bn was reported for the second quarter. Both these results were still far below the $1.26bn reported in Q3 of FY21. Therefore, it’s clear that a lot of the demand was related to the pandemic, and as things continue to return to normality, the situation for Peloton may deteriorate further.

News that the company was considering cutting its workforce and production output due to the reduced demand is also a worry. This is because it lessens the likelihood that the company will ever be able to reach profitability.

Nonetheless, there are still several positives associated with Peloton stock. For one, the monthly churn rate (the number of subscribers leaving each month) was just 0.79% in the second quarter. This demonstrates that there’s still enthusiasm for Peloton’s products.

Overall, I believe that it may be slightly too cheap, and the takeover news is clearly a major positive. But it’s not enough to make me buy. I prefer growth stocks that are actually seeing growth. Peloton has far too many problems, and profitability doesn’t seem close at all. Therefore, I’ll be watching from the sidelines for the time being.

A tail-spin of negative headlines

Peloton’s woes can be traced back to November 2020. Back then, still in the grip of the pandemic and stay-at-home orders across large parts of the globe, people turned to its bikes and treadmills in huge numbers in order to work out. But as customer complaints begun to rise due to shipping delays from Asia, it was forced to invest heavily in air freight.

In order to bolster its manufacturing capability in the US, it paid $420m to acquire fitness equipment manufacturer, Precor. Then, in May 2021, it announced its intention to build its first US factory, due to open in 2023.

However, negative press continued to follow Peloton. First, the company was slow to act in response to safety concerns regarding its Tread+ machines following the death of a child. Then came the share price fall in response to an HBO reboot of Sex and the City in which one of the stars died of a coronary following an intense cycle workout on one of its machines.

Last week, the stock lost a quarter of its value when a leaked internal report that the company intended to halt production of its fitness equipment. The reason given was a “significant reduction” in demand. There were also unconfirmed reports that it would delay the opening of its US factory until 2024 to save costs.

Can Peloton recover?

It is clear that Peloton’s prediction about its sales growth in a post-pandemic world were wrong. Unlike the work-from-home trend, which seems to be here to stay, a lot of people still want to go to the gym or train outdoors. And, besides, competition in the home-gym equipment market is more intense today. In a recent survey of 4,000 people by insurer Aviva, many deeply regretted buying big-ticket items to entertain themselves – including exercise equipment – during lockdown. Although hardly scientific, I think this tells a tale itself.

What will happen to Peloton’s stock price in 2022 is anyone’s guess. What is clear is that near-term tail risks remain. For example, with inflation rising and heightened supply chain costs, the company intends to start charging customers hefty additional fees for delivery and set up. I expect such charges to impact on sales figures in 2022.

Of course, Peloton is a lot more than just a fitness equipment manufacturer. It also charges a monthly subscription fee for on-demand content. I am also encouraged by its ability to innovate. Its most recent offering, Peloton Guide, is a strength-training gym. It’s a no-frills product consisting of a camera that plugs into a tv and monitors a user’s movements.

In the mid-term, I doubt Peloton’s share price will reach anywhere near $167. Whether it sinks from here, though, will very much depend on how well it can make itself relevant to people’s lives in a post-pandemic world.

Peloton and its IPO

Peloton is a home fitness company selling stationary bikes and treadmills. Its unique offering is its subscription service where members pay a monthly fee for classes and access to a competitive leaderboard. I view this favourably because it brings a higher-margin software element to the business model. If enough customers subscribe to Peloton’s services, it also strengthens its competitive advantage as users will be competing against one another on its unique leaderboard.

The company listed through an initial public offering (IPO) back in September 2019. At the time, the stock was priced at $29 per share. However, after last Friday’s close, the share price is now only a touch over $27. This means I’d have lost money had I bought the stock at the IPO. A 7% loss to be exact, but this doesn’t tell the whole story.

What’s gone wrong?

Peloton’s share price reached a peak of $170 back in January 2021. If I’d bought £1,000 of stock back then, my investment would only be worth £159 today. Ouch.

So, what’s gone wrong? Well, Peloton was a major beneficiary of lockdowns due to Covid. When gyms were shut, consumers were left with little option but to exercise at home. Peloton grew sales by 100% in fiscal 2020 (the 12 months to 30 June 2020), and by a further 120% in fiscal 2021.

This is spectacular growth as the company really capitalised on the increased demand for home workouts. It propelled the stock price from the $29 at IPO, to the January 2021 peak. That was a 486% return. It meany my £1,000 investment at IPO would have been worth a huge £5,862 at the top.

However, revenue growth expectations are much lower now. Indeed, for fiscal 2022, revenue is expected to increase by almost 11%. I still consider this a reasonable growth rate, but it’s far lower than the pandemic-fuelled growth that Peloton achieved in the previous two years.

The valuation of the company has also deflated considerably. Peloton is still loss-making, so I can’t value the company relative to its earnings. Based on a price-to-sales (P/S) ratio, though, the shares are trading on a multiple of 2. However, back when the share price was $170, the stock traded on a P/S of 9. The combination of slowing growth and a declining valuation has led to the share price crash.

Should I buy Peloton stock?

I actually think the valuation is more compelling today, at least compared to this time last year. But is this enough for me to invest?

I don’t think it is. While I see the value in the subscription model, I don’t think it’s a strong enough economic moat to get me interested. I see growth slowing further, so I won’t be adding Peloton stock to my portfolio today.

Speculation hurting Peloton shares

I have to be careful noting the news from yesterday because technically nothing has been confirmed by the company. Media reports have claimed that the business is going to suspend production of the Peloton bike for at least a month “according to internal documents obtained”. This follows up on other reports circulating that the firm is planning on some store closures and layoffs.

Although I’ll have to wait to see whether/how much of these rumours are true, investors clearly haven’t decided to wait around. Some clearly think that the reports are true, hence the reason why Peloton shares have fallen.

Halting production or closing stores highlights that demand isn’t strong for core products. This could lead to lower sales, lower profit and a lower company valuation. 

In the short term, if the business comes out and refutes the claims, then Peloton shares could swiftly move higher. Yet I could see some truth in these reports. Back in November, I wrote about the company following poor results that were released. In the outlook for 2022, the business commented that “we anticipated fiscal 2022 would be a very challenging year to forecast, given unusual year-ago comparisons, demand uncertainty amidst reopening economies, and widely-reported supply chain constraints and commodity cost pressures”.

Therefore, in some ways the management team was preparing the market for the potential of underperformance. 

Potential long-term value

The question for me now is whether the company has long-term value. I find it interesting that at $24, the share price is back to where it was just as the pandemic hit. People staying at home turned into a huge bonus for the company, which grew substantially during 2020. So I don’t see any pandemic premium now built in to the share price. This makes the shares more attractive to me, as the share price hasn’t been bid up by speculative investors as much.

However, one of the primary reasons why the company has done so well is the pandemic and the restrictions that came with it. In my personal view, Covid-19 will be something that we will have around forever. But at the same time, I don’t see the world going back into a lockdown in the same way as 2020 or early 2021. So I think Peloton shares may not see their price above $100 for the foreseeable future.

I do think that the company will have to cut costs, trim down and rethink the strategy going forward. Yet fundamentally it’s in a good position in the sector and has a good product. Bringing this all together, I do think that in years to come, Peloton shares will be higher than $24, but won’t reach the heights seen last year. As a result, I’m considering a small investment in the company at the moment.

An attractive FTSE 100 buy

The FTSE 100 stock I’m considering buying is Next (LSE:NXT). Over the past year, the share price has risen by 5.2%. The company is a key player in clothing and home products in the UK. It operates both online and through a network of several hundred stores throughout the country, as well as having a presence internationally.

The online operation helped the business to cope in difficult periods during the pandemic when stores were closed. This is one reason that gives me confidence going forward. Even with uncertainty still in the air around Covid-19, I think that Next is a retailer that’s in a better position than some peers to navigate further disruption.

Another reason why I’m positive on the FTSE 100 stock is due to the recent trading update. It showed a strong trading performance over the two months through to Christmas. Full-price sales were up 20% when compared to the same period in 2019. It also increased its pre-tax profit forecast for the year, as well as expecting net debt to fall by £487m to £625m.

One risk is that prices might have to be increased to counteract higher inflation. The business noted higher overall costs from freight rates, manufacturing costs and wage inflation. Increasing prices could see lower sales if customers choose to shop elsewhere.

A fall from grace

A stock I’m not considering buying at the moment is Peloton Interactive (NASDAQ:PTON). I last wrote about the company late last year, following a 35% fall in a day after bad results.

The company has managed to slow the fall since then, but over the past year it’s still down 77%. Even at $36, I don’t think the company is an undervalued buy, with the IPO price having been $29. 

The business admitted core issues in the latest trading update. It mentioned that fiscal 2022 would be challenging due to “reopening economies, and widely-reported supply chain constraints and commodity cost pressures.” I’d also add into the mix that product recalls from last year over safety concerns won’t help with reputational damage.

With this backdrop, I struggle to see why I’d buy this over a FTSE 100 stock like Next. The company may have long-term value with diversification options away from just the Peloton bike that could support revenue growth in coming years. But I won’t be investing.

It’s not all that surprising though. Thinking back to 2020 when the pandemic first hit, certain stocks and sectors outperformed others. This pattern began to emerge on Friday when stay-at-home stocks rallied. These businesses could be about to benefit again if the new strain of Covid leads to more strict lockdowns.

Let’s see if there’s an opportunity here for my portfolio.

A US stock for video calling

The first company is Zoom (NASDAQ: ZM) as the share price popped almost 6% on Friday. However, this does mask an overall weekly fall of over 12% after its third-quarter results were announced, which I wrote about here. And it’s down over 50% year-on-year.

The main theme in Zoom’s results was a slowdown in the rate of growth. This is understandable given that workers have begun to return to offices, which lessens the need for Zoom’s video conferencing platform.

But does this new Covid strain change things, and will growth now begin to increase?

I’m not so sure. I do think it reinforces the need for Zoom’s platform and that subscriptions will be maintained. However, I don’t think it will accelerate growth to the levels the company achieved in the earlier part of the pandemic. Most businesses that need a Zoom subscription will likely have one by now, so a new strain of Covid may reduce the likelihood of customer churn more than anything. I then have concerns over competition, with Microsoft Teams being a prime example. Microsoft has improved its video conferencing capabilities over the past 18 months, so Zoom has a big competitor now. This wasn’t the case in 2020 when it was the clear leader.

I still like the economics of the business. It achieves high profit margins and is cash generative. But its high valuation puts me off as I don’t think this new Covid strain marks a significant turning point in its growth potential. It’s staying on my watchlist for now.

A stay-at-home fitness company

The next company is Peloton (NASDAQ: PTON). Its share price jumped almost 6% on Friday too. However, the stock has had a torrid time this year, and is down by 69% on a year-to-date basis.

Will this new Covid scare mark a turning point for the share price?

Again, I don’t think it will. The company manufactures and sells stationary bikes and treadmills for at-home fitness purposes. An added membership subscription means users have access to classes, and can compete against other Peloton equipment owners. It’s a great idea, and the share price boomed when gyms were shut.

But I just don’t think gyms will shut this time round due to Covid. We have vaccines now, and I think governments are generally against the sort of strict lockdowns they imposed before. The company is also still loss-making, and only forecast to grow revenue by 14% in fiscal 2022.

I could be completely wrong about Peloton, and the new Covid strain may mean revenue grows way more than current forecasts. This might be the catalyst for the share price to rally to previous highs around $160, which is significantly more than the $46 share price today.

But for now, I think there are better US stocks to consider.

Here, I’m going to highlight some key trades they’ve been making recently. Should I buy these stocks for my own portfolio?

Blue Whale

Let’s start with boutique investment management firm Blue Whale. It runs the Blue Whale Growth fund, which has delivered excellent returns for investors since its launch a little over four years ago.

Here, portfolio manager Stephen Yiu has been adding to his position in semiconductor manufacturing equipment maker ASML (NASDAQ: ASML). Yiu believes ASML, which sells its equipment to the likes of Taiwan Semiconductor Manufacturing Company, Samsung, and Intel, is “well-positioned to benefit disproportionately from the almost 25% expected yearly growth in demand for smart and connected devices going into the next decade.”

Would I buy ASML for my own portfolio? Yes. I actually bought some stock last month when it was trading near $740. My view is that with governments looking to build semiconductor manufacturing plants domestically, ASML is well-placed for growth.

It’s worth noting that its shares aren’t cheap. Currently, the forward-looking P/E ratio is about 55. This adds risk. However, I’m comfortable with the valuation as ASML basically has a monopoly position in its market.

Baillie Gifford

Next up, Baillie Gifford. It runs the very popular Scottish Mortgage Investment Trust as well as a number of other top-performing growth funds.

Looking at the investment manager’s latest 13F filing, it’s interesting to see it has recently been buying shares in fitness equipment company Peloton (NASDAQ: PTON). In the third quarter of 2021, the firm snapped up 7.9m PTON shares, increasing the size of its holding by nearly 40%. 

This is a stock I’m happy to avoid for now as the company is struggling a bit. This is illustrated by the fact that it generated a huge loss in the most recent quarter and also cut its revenue guidance for the last quarter of 2021 by $1bn.

It’s also worth pointing out that Peloton’s management is still confident about the long-term growth story. I think there are better stocks to buy right now however.

Fundsmith

Finally, we have Fundsmith, which runs the UK’s most popular fund, Fundsmith Equity. Its latest factsheet reveals that, in October, the fund completed the purchase of a position in Amazon (NASDAQ:AMZN). This is a stock fund manager Terry Smith has had his eye on for a while. It seems he finally sees the valuation as attractive.

Would I buy Amazon shares for my portfolio today? Yes. The stock has lagged the market this year and I think the share price weakness has provided a good buying opportunity. Of course, the stock isn’t cheap at 70 times next year’s expected earnings. However, I’m comfortable with that multiple given Amazon’s dominance.

I’ll point out that Amazon does have a few challenges to work through in the near term. Supply chain issues and wage inflation are two issues the company is dealing with right now. These could impact near-term growth.

I don’t expect these issues to last forever though. Eventually, they should dissipate and when they do, I think Amazon’s share price is likely to move higher.