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2019-10-21 20:27:07

Peloton / YoutubeWall Street overwhelmingly thinks Pelotonis undervalued at current levels. 18 analysts initiated coverage Monday with price targets higher than where Peloton currently trades.Shares initially gained 3%, then fell more than 7% at intraday lows.Analysts think the company has a solid runway for growth and profitability in the future.Watch Peloton trade live on Markets Insider.

Wall Street thinks Peloton's stock is undervalued after shares have traded consistently below the $29 IPO price since the company went public in September.

On its first day of trading in September, the company closed 11% below its initial price of $29 per share, erasing more than $900 million in investor capital. Since, the company has struggled to recover lost ground and is trading around $24 per share, roughly 17% below its IPO price.

Wall Street thinks that's a discount. Of the 18 analysts who initiated coverage on shares of the bicycling exercise company Monday, 17 have rated shares a buy and one has given shares a hold rating. So far, there are no sell ratings. Price targets range from $24 to $37, showing that nearly all analysts currently covering Peloton think that the stock is undervalued where it is currently trading at roughly $24 per share.

Shares of Peloton traded down more than 7% at intraday lows.

The bullish sentiment from the Street is focused on Peloton's ability to become profitable in the near term, something more investors are paying attention to after a number of IPO flops from unprofitable unicorns such as Uber and Lyft. In addition, analysts say Peloton's mix of hardware and software plus its customer loyalty pave the way for huge future growth.

Here's a roundup of what some analysts who initiated coverage of Peloton are saying about the company:

1. Bank of America Merrill Lynch: Impressive high retention rate and low churn. Peloton / Youtube

Rating: Buy

Price target: $29

With the stock down 19% from the IPO price (vs flat for S&P) and now trading below our group of high-quality peer multiples despite higher expected growth, we initiate with a Buy rating, wrote Bank of America Merrill Lynch analyst Justin Post in a Monday note.

Peloton's net promoter scores (avg. of 86) compare well to strong consumer brands like Netflix and Apple. In our view, an investment in Peloton is also an investment in the management team as, like Netflix, we expect many competitive challenges, and we think high quality & execution will maintain a strong market position.

Based on a 80mn gym member TAM in current markets, we believe Peloton can capture over 10mn subscribers long-term.

Peloton has an impressive high retention rate and low churn, with average Net Monthly Connected Fitness Churn below 1% a month at 0.65% in FY19. Peloton's annualized churn rate works out to be a little less than 7%, significantly lower than its peers such as Planet Fitness, which has an annualized churn rate of 18% to 30%.

2. UBS: Healthy level of conservatism with regards to Peloton's path to profitability. Peloton

Rating: Buy

Price target: $30

While we think investor expectations bake in solid rev growth, we believe there is a healthy level of conservatism with regards to Peloton's path to profitability, wrote a team of UBS analysts led by Eric Sheridan in a Monday note.

We estimate Peloton can achieve ~4.6% penetration of our FY24E total addressable household estimate and grow total revs at ~44% FY'19-24E CAGR.

We see several large revenue opportunities that could potentially lead to higher than expected growth over the long term:

1) int'l expansion into adjacent markets outside of their current four markets (US,Canada, UK & Germany);

2) new product, software or category launches;

3) greater focus on Peloton Digital as a key growth driver and subscriber acquisition channel.

3. JPMorgan: Peloton retains control over the entire member journey. Peloton

Rating: Overweight

Price target: $32

Peloton is the largest interactive fitness platform in the world, with 1.4M+ members across the US, UK, & Canada. We believe Peloton is well positioned to disrupt the fitness industry through its at-home connected fitness subscription platform, with significant runway for growth as the company's current SAM is only 4% penetrated, wrote a team of analysts led by Doug Anmuth in a Monday note.

We believe Peloton has a compelling financial profile, including multiple growth levers that should support 35%+ top-line growth through FY24 (i.e. expanded product portfolio & international market launches), and strong unit economics that give us confidence in Peloton's ability to achieve significant profitability over time (i.e. $5 nCAC/sub and 60% Subscription Contribution Margin).

Peloton retains control over the entire member journey, which allows the company to deliver on its members-first mission and ensure a positive member experience.

4. Cowen: Arguably the hottest brand in home fitness Peloton

Rating: Outperform

Price target: $34

Peloton is arguably the hottest brand in home fitness, with its popular hardware (led by the bike), live-streamed classes, and passionate community; PTON boasts >500K subscriptions and >1.4MM members. As a first mover in the space, the company currently faces few true comps that combine its premium hardware, software, content, logistics and community, wrote a team of analysts led by John Blackledge at Cowen on Monday.

Consumers largely think of Peloton as a bike/spin company due to the popularity and dominance of its eponymous bike, but LT opportunity from treadmills could actually be larger due to broader popularity of treadmills vs. stationary bikes, both in the US & International.

We view Peloton's path to profitability over time as driven largely by scale, with leverage across content creation fixed costs and efficiencies across Sales & Marketing and G&A; of note, Peloton's passionate following lends itself to strong word of mouth & earned ( free ) media.

5. Goldman Sachs: Attractive risk reward. Peloton / Youtube

Rating: Buy

Price target: $37

While Peloton is still early-stage as a platform and as an investment with all of the risks that implies, we believe that the large and emerging addressable market opportunity, growing competitive moats, and, in our view, conservative investor expectations create an attractive risk reward, wrote a team of Goldman analysts led by Heath Terry in a Monday note.

While the cost of a $2,245 bike or a $4,295 treadmill is of course a limiting factor, much like a $1,000 phone was once thought to be, the ability to finance the cost of a bike down to $58/month over 39 months and spread it over multiple household members we think should minimize much of that.

While we expect Peloton will reach adj. EBITDA and cash profitability in FY23 and FY24, respectively, we believe Peloton can reach 20%+ adj. EBITDA margins in the long-term, driven by growing mix of subscription gross profit and leverage on other operating expenses as the company scales.


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