Is Peloton's share price vulnerable to competition fears?

This article was originally published on Opto - Understand What Really Moves Markets.

Peloton's [PTON] share price rose at the height of the initial lockdown with gyms closed, and the connected-fitness company has seen a surge in both online subscriptions and sales of its high-end exercise bikes. Peloton saw a 172% increase in sales in the first quarter compared to the same period last year. Such has been the demand that Peloton made its first-ever quarterly profit, speeding away with $89m, compared to the $47.4m loss it made last year.

A resurgence in COVID-19 has seen Peloton's share price reflect a return to overwhelming demand in recent weeks:

"While we had expected demand to moderate, the unexpected resurgence of Covid-19 cases in many states has perpetuated the imbalance of supply and demand in many geographies, causing continued elongated order-to-delivery windows for our customers. While we reduced wait times since May, there remains much work to be done," said Peloton CEO John Foley.

Despite the recent success, however, Peloton's share price is not guaranteed a place at the top of the podium.

The not-so 'Prime bike'

Peloton's share price gains are, in part, due to a lack of any real competition. However, that could all change if a company like Amazon decided it wanted part of the market. Last week, Peloton's share price slipped 5% as it appeared Amazon [AMZN]had collaborated with Echelon Fitness on a low-cost exercise bike.

While Amazon dismissed this as a hoax, the reaction of Peloton's share price underscores how vulnerable the company is to any potential new, cheaper rivals. If Amazon decided they really wanted to get into the connected-fitness space, there's not much Peloton could do about it.

Bloomberg's Sarah Halzack identifies three companies that are looking to mount such a challenge: high-profile SoulCyle, which is now offering an at-home bike; Lululemon Athletica [LULU], which has bought home fitness start-up Mirror; and Apple, with its home fitness offering, Fitness+. This last is perhaps the biggest threat to Peloton, given Apple's financial standing, brand appeal and integration with its Apple Watch.

Is Peloton too expensive for its own good?

Halzack argues that for Peloton's share price to maintain its gains, the company needs to expand beyond its bike business. However, its other products, including a PS2,295 treadmill, aren't cheap. Halzack also seems sceptical about how many people have room to set up a fully functioning home gym, which could limit just how much expansion is really possible.

"Despite the many meme-able images of Peloton users cycling in their cavernous, lavishly appointed, mid-century modern abodes, I have to wonder how many people have space (let alone the budget) for an expanded suite of Peloton hardware," said Halzack.

For the cost-conscious, a second-hand exercise bike might seem a better option than a PS1750 Peloton bike. After all, Peloton Digital Members don't actually need a Peloton bike to access online classes. These classes are where Peloton is making a hefty profit, with the lifetime value of a subscriber pegged at $3,600.

"In short, anything that might get someone hooked on a full Peloton membership - be it a pair of Rollerblades or grandpa's old rowing machine - is likely a win for the company long-term," said Kyle Stock in Bloomberg's Sunday Strategist column.

However, subscription services that offer workout videos are also the easiest part of Peloton's business to replicate. Apple Fitness+, for example, will offer workouts from top trainers at a cost of PS9.99 a month, or PS79.99 for the year, when it launches. Not only does this undercut Peloton, but an Apple Watch is cheaper than a Peloton bike, and it takes up a lot less space.

How much churn the competition creates as users flit between services will go some way in determining Peloton's share price performance going forwards.

The analysts tracking Peloton on Yahoo Finance have an average $113.83 price target. Hitting this would see a 13.3% upside on the current price.

Of the 26 analysts offering recommendations on Peloton's share price, 9 rate it a Strong Buy and 15 a Buy.

The Essential Stock Market Digest: Join 30,000+ Opto subscribers getting market-moving news direct to their inbox, 4 x a week.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.

Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. View our full disclaimer, here.