Underlying the anemic post-IPO performance of Peloton Interactive shares is one question: How many people want to spend $2,000 on a connected stationary bike that requires a $40-a-month subscription to be of any real value?
MKM Partners analyst Rohit Kulkarni thinks that the answer is, not that many. He launched coverage of Peloton stock (ticker: PTON) with a Neutral rating. His target for the stock price is $24, about in line with the current level, and well below the $29 investors paid in the company’s Sept. 26 initial public offering.
Kulkarni concedes that Peloton has produced impressive revenue growth, and has found a “superior product-market fit.” But he sees a limited market the company can serve, saying the company’s push to provide customers an outstanding experience has created an “overburdened cost structure, leading to a long and windy pathway to profitability.”
Here’s how Kulkari evaluates the potential market. He notes that there are 13 million to 18 million U.S. households with income above $150,000. If the company can reach 10% market penetration, that would be some 1.5 million households. (In its IPO prospectus, Peloton said that as of June 30, it had sold 577,000 Connected Fitness Products, 564,000 of those in the U.S.)
The MKM analyst also notes that the company is likely to report operating losses and continue to burn cash for at least another 24 months. If Peloton’s revenue growth slows, the current valuation would likely shrink, he warns.
He also finds a lack of clarity on how investors will approach valuing the business over the long haul. “Until the company shows clear signs of profitability, we believe investors would struggle to agree upon a range of revenue multiples, given diverse revenue segments with a complicated yet one-of-a-kind business model which includes elements of wearables, hardware, subscription media, and luxury apparel,” he writes.
Bullish investors, he thinks, will compare the company to “best-in-class direct-to-consumer stories” like Netflix (NFLX), Spotify Technology (SPOT), Roku (ROKU), and Lululemon Athletica (LULU), while bearish investors might anchor around specialty hardware and lifestyle stocks such as Fitbit (FIT), GoPro (GPRO), Sonos (SONO), and Under Armour (UA).
That is a wide range of potential outcomes. Roku is trading for about 14 times forward revenues. GoPro is trading for less than 0.5 times. (Peloton for now has split the difference, trading at about four times.)
Peloton closed down 3.2% at $22.39.
Write to Eric J. Savitz at email@example.com