Loop Capital believes Peloton's pricing power potential is underappreciated by investors
Shares of Peloton Interactive (PTON) are on the rise on Monday after Loop Capital analyst Daniel Adam initiated coverage of the stock with a Buy rating. The analyst believes the impact of the recent recalls will be short-lived and that management's guidance "likely bakes in an excessive amount of conservatism."
SHORT-LIVED RECALL IMPACT: Loop Capital analyst Daniel Adam initiated coverage of Peloton Interactive with a Buy rating and $140 price target. The shares are down 40% from the January highs, in large part due to the company's voluntary recalls of the Tread and Tread+ and negative press around the safety of those products, Adam noted. The analyst believes, however, that the impact of the recalls will be short-lived and that management's guidance "likely bakes in an excessive amount of conservatism." Peloton "could easily" raise subscription prices and its pricing power potential is underappreciated by investors, the analyst argued. He expects Peloton's subscription revenue growth to continue outpacing growth in its Connected Fitness products and estimates subscription revenues lifting 67% annually over the next two years versus 20% average annual growth in Connect Fitness products.
After hosting its CFO Jill Woodworth at the firm's conference last month, JPMorgan analyst Doug Anmuth kept an Overweight rating on Peloton Interactive. The analyst believes the Peloton Output Park facility will further solidify the company's supply chain, and that Peloton has solved its manufacturing issues. The company's investment in its domestic manufacturing footprint indicates it remains confident on strong demand across a range of products over time, Anmuth contended. Further, the analyst pointed out that management remains confident in strong Tread demand and the delay is only a couple months.
TREAD, TREAD+ RECALLS: Earlier last month, Peloton was in the spotlight following the announcement of two separate voluntary recalls of the company’s Tread+ and Tread treadmills. Peloton said it was recalling about 125,000 Tread+ treadmills with model number TR01 after a six-year-old child recently died after being pulled under the rear of the treadmill and following 72 reports of incidents involving the treadmills. Additionally, Peloton recalled about 1,050 Tread treadmills in the U.S. and about 5,400 in Canada, as the touchscreen on the treadmill can detach and fall, posing a risk of injury to consumers.
On May 19, the company said on its support site that, "Tread Lock is a safety feature that automatically locks the Peloton Tread+ after you put your Tread+ to sleep or after 45 seconds of inactivity outside of a class...As soon as your Tread+ receives the latest software update, you will be prompted to activate the Tread Lock. Once the passcode has been set, the belt on your Tread+ will automatically lock after 45 seconds of inactivity outside of a class, or after the Tread+ wakes from sleep or restart. You will then have to enter your Tread Lock passcode to unlock the belt and get moving. Tread Lock is an important feature to ensure that your Tread+ is safer than ever before. You will be required to set up Tread Lock."
WHAT'S NOTABLE: Stifel analyst Scott Devitt told investors in a research note on Friday that Peloton has been offering its digital members the chance to buy a refurbished original Peloton Bike at a roughly 20% discount for a limited time. Though he doesn't view the promotion as likely to material and thinks it was already contemplated in near-term forecasts, the deal highlights the increasing value of the growing digital subscriber base as a pipeline and points to "incremental experimentation with a certified pre-owned program," said Devitt, who has a Buy rating and $140 price target on Peloton shares.
PRICE ACTION: In Monday morning trading, shares of Peloton have gained about 5% to $108.35.