Shares of Peloton (PTON) were higher in morning trading after an analyst at Baird initiated coverage of the stock with an Outperform rating, even after admitting that achieving profitability "may prove difficult" over the next five years.
BAIRD SAYS BUY PELOTON: Baird analyst Jonathan Komp initiated Peloton shares with an Outperform rating and $28 price target, telling investors in a research note that the company has "created a better fitness model providing premium content via a vertically integrated digital platform." Komp noted that key satisfaction and engagement measures are "very positive" and added that he sees a sizable potential market. However, the Baird analyst admitted that achieving GAAP profitability "may prove difficult" over the next five years due to investments, but contends that Peloton has substantial long-term sales and profit upside. Further, he said that Peloton's platform, which delivers instructor-led fitness content via its "box+subscription" model, is "disrupting" part of the fitness market. He sees a large addressable market that can help to capture a $5B+ revenue opportunity by fiscal 2024.
IPO BACKGROUND: Peloton's initial public offering last month was a widely anticipated event, but shares were down 11% at the end of its first day of trading from its IPO price. . The company had priced 40M shares at $29.00, at the high end of the $26.00-$29.00 range. In an interview with CNN, CEO John Foley admitted to "some slight disappointment" with the stock's initial performance. "Obviously the waters are extremely choppy and we're following like everybody else," he said. "We're trying not to take it personally."
In a research note ahead of the company's IPO, DA Davidson analyst Michael Kawamoto initiated coverage of Peloton with a Neutral rating and $29 price target, stating that the company has "impressive" topline growth, but market saturation and its ability to scale remain questions. Recent investments, along with "very robust marketing spend," will keep profitability "muted" for at least the next few years, the analyst added. Following the IPO, the DA Davidson analyst reiterated that he i impressed by the company's "robust" growth metrics, but feels investors are skeptical over the company's potentially much higher "churn" figures in Peloton Digital, since this these exercise users do not have a large fixed cost anchoring them to the platform.
In his note to investors, Baird's Komp acknowledged that the IPO was “disappointing,” but he still has a "positive outlook" for the company, especially if it delivers "strong early results." He contended that it was a "broken IPO," but "not a broken company."
WHAT'S NOTABLE: High-profile startups like Lyft (LYFT), Uber (UBER) and Slack (WORK) have largely bombed on the stock market since going public this year, while WeWork (WE) recently pulled its IPO. Food-delivery startup Postmates, which was expected to go public this year, recently told its IPO advisers that it is delaying its IPO due to market conditions, Recode's Theodore Schleifer reported on Tuesday.
PRICE ACTION: In morning trading, shares of Peloton are up 2.1% to $23.70.