Should Peloton (PTON) be on your watch list?

Shares of Peloton Interactive Inc. (NASDAQ: PTON) were up 3.4% on Tuesday. The stock has dropped 25% since the beginning of the year. Peloton benefited hugely last year during the COVID-19 pandemic as more people started to work out at home due to gym closures. There is now the question of whether this momentum will continue once restrictions are lifted and things normalize.

Strengths

Peloton witnessed huge demand for its products as working out from home saw an increase. As the situation has not fully eased out yet and because people may find working out from home more convenient and enjoyable, it is likely that this trend could continue in the near term. This would benefit Peloton and help drive sales of its connected fitness products.

For its most recent quarter, Peloton generated revenues of $1.06 billion, up 128% year-over-year, fueled by strong demand for its connected fitness products and low churn levels. Connected Fitness revenue made up 82% of total revenue and recorded a YoY growth of 124%.

The $420 million acquisition of Precor is another strong area for Peloton. This acquisition will help Peloton establish its manufacturing capacity in the US and help improve its product offerings. It will help the company meet the growing demand for its products. Peloton plans to start the production of connected fitness products in the US before the end of this year.

During the second quarter, Peloton witnessed strong demand for its Bike, Bike+ and Tread+ products, which in turn helped drive growth in connected fitness subscriptions. In Q2, connected fitness subscriptions rose 134% to around 1.67 million and paid digital subscriptions jumped 472% to around 625,000. Total members grew to over 4.4 million.

Peloton’s expansion into Australia is another strong move which provides opportunities to move further into the Asia-Pacific region paving the way for more growth.

Risks

In Q2, Peloton’s connected fitness subscription workouts grew 303% to over 98.1 million. There are concerns on how long the growth in subscriptions will continue once the gyms reopen and people go back to their old routines. There are chances that the growth trend in subscriptions might moderate during the latter half of the year or by early next year but nothing is set in stone.

Another challenge the company has been facing is the delay in deliveries as it struggles to meet with the spike in demand for its products. Peloton has increased its production and invested significantly in its supply chain capabilities to tackle this issue. The company has invested $100 million to speed up its delivery capabilities and this is likely to take a toll on profits.

Outlook

Peloton is likely to see demand for its products as long as the pandemic situation persists. The company expects revenues of $1.10 billion for the third quarter of 2021 and $4.075 billion or more for the full year of 2021.

In short, Peloton is worth having on your watch list right now as there is a lot of optimism surrounding this stock. However, the chances of a moderation does provide cause for caution. It would be best to wait and watch how the trends play out before making a decision on this stock.

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