The Ratings Game: Peloton’s rough ride continues despite comparisons to Apple and Roku

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The adrenaline rush stemming from 18 bullish analyst notes doesn’t seem like enough to give Peloton Interactive Inc.’s stock a boost.

Though shares of Peloton PTON, -4.55%  initially rose after analysts overwhelmingly assigned buy ratings to the stock ahead of Monday’s open, shares are now trading about 4% lower in the regular session.

The bullish view is that Peloton has a large market opportunity ahead of it as consumer attitudes toward exercise continue to evolve and as Peloton pushes further into international markets.

“Scaling the business in the U.K. and Germany (forthcoming) may be the beginning of a multiyear international growth story,” Stifel analyst Scott Devitt wrote in a note to clients. “In the U.S., we estimate Peloton is less than 5% penetrated leaving a long runway for domestic growth.”

Devitt rates the stock a buy with a $35 target price, which makes him the most optimistic analyst tracked by FactSet.

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Raymond James analyst Justin Patterson said that Peloton is adding increasing functionality to its membership programs, helping to deliver more value that could make users look past the expensive upfront costs of Peloton’s spin bike ($2,245) and treadmill ($4,295).

“Peloton is disrupting the fitness industry by leaning into convenience (it is in your house, so fewer excuses), content (class offerings are increasingly broad), and cost (it gets even less expensive as you use it and share it),” he wrote. “In short, this is a classic shift from a linear model to an on-demand model. Recent history in video, music, and entertainment suggests Peloton is poised to be a winner.”

In Patterson’s view, Peloton has a wide lead on competitors even as connected fitness becomes more mainstream. “Product quality is top notch, brand awareness is high (as measured by Instagram followers), engagement is growing (and creates repeat rate via leaderboard competition and endorphins), and fulfillment is an edge,” he wrote. He rates the stock at outperform with a $32 target price.

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JMP Securities analyst likened the company to Apple Inc. AAPL, +1.79%  and Roku Inc. ROKU, +2.65%, calling these “among the best comps” for Peloton as those two tech companies have hardware sales but are increasingly focused on generating high-margin software revenue.

“We expect Peloton to benefit from this same dynamic as higher-margin subscription revenue accounts for a greater share of revenue and profitability over time,” wrote Josey, who rates the stock at market outperform with a $33 target price. “To that end, subscription accounted for 20% of FY2019 revenue and 26% of FY2019 gross margin, and we project subscription to account for 27% of revenue and 45% of gross margin in FY2025.”

Needham’s Laura Martin sees “growing network effects” for Peloton that are likely to keep users engaged, in her view. “In 4Q19, about 6,400 people took each class, across library and live classes, so there are generally 10-30 people riding the class no matter when a ride begins, which gives riders an option to connect to others if that motivates them to work harder, finish the ride, compete, etc,” wrote Martin, who set a buy rating and $30 target on Peloton’s stock. “As Peloton’s installed base of riders grows, more people are simultaneously taking any ride, no matter when it begins.”

At least 20 analysts now cover Peloton’s stock, according to FactSet, following 18 new initiations on Monday. Of those who follow the stock, 18 analysts have buy ratings and the other two have hold ratings.

One of those more tepid views came from Michael Kawamoto of D.A. Davidson shortly after Peloton’s initial public offering. “We remain impressed with Peloton’s robust growth metrics, but believe the path to profitability is a long one, as recent investments will take time to ramp,” he wrote. Kawamoto set a neutral rating and $29 target on the shares.

At least 14 of the buy ratings belong to underwriters of Peloton’s IPO. The company priced its IPO at $29 in late September and the stock opened at $27 that day. The stock recently changed hands at $22.70.

Shares are off roughly 10% so far this month, while the S&P 500 index SPX, +0.65%  is up 0.8%.

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