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Weekly BullsEye | A Risky Stock Could Gain Over 400% This Year, And We Think It Worth A Shot

AInvestWednesday, Jan 17, 2024 3:29 am ET
3min read

Remember Peloton? The exercise equipment company whose stocks once reached $160 per share during the pandemic and whose advertisements were seen on almost every TV channel?

It once was one of the hottest stocks in the market and one of the investors' favorites. However, after 2021, it seems to suddenly vanish from the world as we rarely see any ad or any big news from this company.

Notably, even now, its stock price has fallen 96% from its peak.

It looks like Peloton is finished and we will witness another sad story from a startup, however, in 2024, this once highly popular company could make its grand return and shock the world one more time, with support from its improved business model, extensive external partnerships, and optimized external environment.

In fact, some opinions believe that this year, Peloton's shares will gain about 224% in 2024, and can even reach a shocking 438% boost in extreme situations based on similar reasonings.

A Brand New Business Model

After experiencing a few years of blind expansion that led to a worrisome revenue and enormous debt amount, Peloton appointed its new CEO, Barry McCarthy, to end this mess. Besides changing the high-level leadership, layoffs, asset sales, and business restructuring, this new CEO also made some major changes to the company's business model.

On the one hand, Peloton has started embracing the rental model. The rental program, which launched in 2022, allows members to rent a Bike or Bike+ and bundle the cost of the hardware with the monthly subscription fee and has undergone numerous modifications swiftly:  It first expanded to additional states, then the entire continental United States, and subsequently Canada, before being available in Germany in 2023.

The development and promotion of the rental program is a key movement for Peloton since it has expanded the use of Peloton's equipment, as consumers no longer have to buy a device at a high cost, which they even do not know how long they want to use.

Simultaneously, revenue from the rental business provides the company with a consistent income source, and the proportion of this income in Peloton's revenue is increasing.

Peloton's financial report for the first quarter of fiscal year 2024 shows that the rental model has already accounted for 33% of the bicycle orders in that quarter. Moreover, rental subscribers in the US and Canada have reached 54,000. According to Peloton's estimates, the company hopes to reach 75,000 subscription users in fiscal 2024 and projects an increase in rental income by up to 90%.

The other key business change to Peloton's business model is the commercialization of its video applications outside its device ecosystem.

Since the company has been established, its fitness-related online content has been a critical component of its business. On Peloton's own platform, users can access thousands of on-demand videos and online courses directed remotely by trainers through the company's equipment and software, covering content like online yoga, meditation, and running. 

However, because these contents can only be accessed through Peloton's devices or software, they haven't led to member conversions as fast as expected.

But now, Peloton has also begun to adjust the access channels for its video content - the most intuitive change being that Peloton is now increasing its cooperation with external partners.

More Partnerships Are Making The Future Brighter

Peloton is trying to grow its brand and revenue through partnership agreements. In September, it announced an agreement with Lululemon Athletica, where Peloton would become the sole provider of digital fitness content for Lululemon's legions of fans. At the same time, Lululemon would become Peloton's primary athletic apparel partner.

A month later, Peloton revealed another similar agreement with the NBA and WNBA, but more importantly, it launched a fitness hub on TikTok through an exclusive partnership with the social media platform.

This deal will grant TikTok users access to various Peloton content, which includes live classes, instructor videos, creator collaborations, class clips, and celebrity tie-ins. Moreover, the partnership also marks the first time that Peloton will be creating content for channels on other platforms.

In our opinion, these series of collaborations are expected to give Peloton's online content higher exposure, attracting larger audiences into Peloton's ecosystem, and potentially becoming a critical part of driving Peloton's revenue growth in the coming years.

Chronic Disease Patients Could Be Key

On the other hand, in the long run, the fitness-related industry will experience a considerable growth rate due to people's increasing attention to their health, especially after three years of the pandemic: A research report pointed out that by 2026, the market size of smart fitness equipment is expected to achieve a compound annual growth rate of 28.9%.

In addition to the market size, the increase in chronic disease patients in the future will stimulate the demand for fitness equipment, as a report from the National Library of Medicine shows chronic disease patients can make up as much as 33% of the worldwide population, and these customers in this category typically value Peloton's convenience more.

In fact, customers with chronic health conditions are more inclined to exercise or rehab at home due to health or lifestyle reasons, and Peloton's equipment, online content, and even its vibrant online community, can offer them an experience similar to going to a gym, but without leaving the house.

Consequently, the gradually expanding market and the potential massive demand will provide Peloton with a favorable external environment. Unlike many of its competitors in the home fitness market, after years of trial and development, Peloton has figured out how to monetize itself.

Indeed, just like many point out, there are certain risks with Peloton due to its past trends, mainly concerning its cash flow and profits. However, with greater risk comes greater rewards, we think it's definitely worth it.

On the one hand, with the continuous improvement in Peloton's business model, we believe there's a great chance of a reduction in these risk probabilities, and more importantly, we think its current stock price of around $6 per share not only represents a smaller investment cost, but also suggests that both the company and its stock will have tremendous growth potential after its asset restructure and business adjustments are completed.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.