What does it take for a stock to mint a millionaire? It depends on how big the investment is and how big the return is. For example, a pedestrian 12% return on a $900,000 investment would make someone a millionaire. But a mind-blowing 100,000% return would turn a $1,000 investment into $1 million as well. However, neither of these examples demonstrate what I mean by “millionaire-maker stock.” I’m referring to something rare yet realistic: A stock that goes up 100 times in value.
Could connected-fitness company Peloton Interactive (NASDAQ:PTON) reach legendary 100-bagger status from today’s price? One thing’s for sure: it’s certainly going to try.
Peloton’s ambitious vision
In Peloton’s recent Investor and Analyst Day Presentation, management laid out what it called a “big hairy audacious goal.” The company intends to attract 100 million subscribers and have a net promoter score (NPS) of 100. For perspective, there are currently around 1.8 million active Peloton subscriptions, and the company has a NPS of 94.
How realistic is the goal of 100 million subscribers? According to Peloton management, there are 200 million people globally paying for a gym membership right now. It argues that having superior equipment available in your home with video content on demand is a better fitness business model. Just as home video game systems replaced the majority of arcades, so too can an exercise-at-home trend upend the traditional brick-and-mortar gym.
Peloton’s NPS of 94 is significant. This score basically means that most customers are loyal to the Peloton brand and will tell their friends for free word-of-mouth publicity. The company’s NPS is confirmed with outstanding user engagement metrics. For example, Peloton’s 2020 cohort of users are the most engaged ever, clocking well over 20 workouts per month from the very beginning. However, past cohorts of users have also steadily increased the usage of their Peloton equipment over the years. In other words, these stationary bikes and treadmills aren’t just collecting dust.
The increasing engagement of Peloton users over time bodes well for the company’s long-term viability. But also consider management’s goal of having a NPS of 100. This score implies all Peloton users will be promoting the brand to their friends; there will be zero unsatisfied customers. CEO John Foley says the company is aware of the issues causing dissatisfaction among a small number of its customers and is actively addressing these problems. While a perfect score of 100 may be unrealistic, actively making improvements is great customer service and suggests Peloton will remain a strong consumer discretionary brand moving forward.
Taking a step back
When talking about Peloton’s plan to get to 100 million subscribers, Foley said it’s increasing its efforts, “so that we make sure that if this is a winner-take-all opportunity, Peloton is going to take it.” In this statement is a subtle suggestion that 100 million subscribers is toward the high end of the premium connected-fitness market. But business is rarely a zero-sum game. Many times, there are multiple winners in emerging industries.
While Peloton seems to be at the forefront of this nascent movement, it’s been unable to keep up with surging consumer demand, and that flings the door wide open to competitors. For example, sales have surged this year for both Bowflex maker Nautilus and NordicTrack maker ICON Health & Fitness. The Wall Street Journal attributes this to potential Peloton customers getting tired of waiting for their equipment and opting for a comparable product from a Peloton competitor instead.
Even taking 50% global market share long-term would be incredible for Peloton. But would that be enough to reach its long-term goal? That seems unlikely to me.
Predicting future financials is difficult. But Peloton’s vision represents a 55-fold increase in subscribers. That undoubtedly would lead to a substantial increase in predictable, recurring revenue. Furthermore, revenue gains would allow profits to soar, since Peloton’s video content is a fixed cost. And, if customers are promoting the brand, Peloton won’t have to spend as much to acquire new customers, reducing that expense. In short, this could become a cash-cow business.
However, as already noted, I’m skeptical about Peloton’s ability to reach 100 million subscribers, at least anytime soon. To me, in a best case scenario, the exercise-at-home trend will continue to grow and Peloton will take a large piece of the pie — but just a piece.
Peloton can grow substantially and expand profits from here, which could be lucrative for long-term shareholders. However, I believe the stock falls short of millionaire-maker status from today’s price.
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