On Wednesday, JPMorgan analysts led by Doug Anmuth raised their Peloton estimates across the board, and set a $105 price target (vs. $58). Peloton was named a ‘top pick’ at the firm, along with Amazon, Facebook and Snap. The Final Round panel discusses the bullish call ahead of the company’s earnings on September 10.
MYLES UDLAND: All right, welcome back to “The Final Round” here on Yahoo Finance. It’s time now for our Call of the Day. And today, we were talking about JPMorgan’s latest note on shares of Peloton. On the firm keeps an overweight rating on the stock, raising its price target to $105 per share and call calling Peloton one of its top picks, along with names like Amazon, Facebook, and Snap.
And I think that’s an interesting group to kind of put Peloton in context with, because it really speaks, Seana, to the conversation that– kind of held about Peloton pre-pandemic, which was would the network of wanting to compete in rides and care about who your instructor was and having a social network effect around the Peloton kind of interface, would that put the company into a new trajectory? And I think, obviously, the pandemic has been a huge boost for them. But JPMorgan here kind of going back to basics with Peloton, saying yes, it’s going to have network effects similar to those seen by the names mentioned there– the Facebook, the Snaps, and the Amazons.
SEANA SMITH: Yeah, and it’s so interesting, because one of the things that stuck out to me in this note is the total addressable market that Peloton has right now. And they’re saying that they’ve only penetrated about 5% of that addressable market. So when you take that into consideration, and if you believe that and believe what JPMorgan is saying, then that really proves that there is significant runway here. There’s significant room for Peloton to grow.
And then they’re also saying that this isn’t just strictly a stay-at-home play, that this is a company that is going to continue to excel once we’re beyond the pandemic. And in this note, they talk about the fact that they will only penetrate about 3% penetration of those gym memberships. And that’s an area of potential growth for the company there.
But it’s really amazing, when you think about these price targets that we’ve gotten. Now so JPMorgan today with $105 a share. We did Goldman last week with $96 a share. And this is a company that not too long ago was trading in the 50s, in the 40s, and even in the 30s. So when you talk about how quickly the stock has come and how bullish the Street still is, I think speaks to the growth trajectory of the company and some of those untapped areas that JPMorgan is highlighting in this note.
The one thing that did stick out to me, and JPMorgan noted it as its biggest challenge, and something that we’ve been talking about, is Peloton just being able to keep up with this elevated demand. They’ve been behind the ball when it comes to manufacturing. And we know that they doubled their pace in manufacturing since March, yet people are still waiting. On average, I think it is six to eight weeks. In some areas, like outside of New York City, the wait is still 10 to 12 weeks. So I there’s going to be a lot of questions on their earnings call that’s coming out pretty soon about how they are addressing the shortfalls when it comes to supply and what they need to do in order to better meet demand down the road.
But, and we have to remember, really quick, one more thing, it’s not just these big products that we’re talking about, the expensive bike or the expensive treadmill. It’s also their subscription app. And that has proven to be so popular. The numbers that we’re getting right now, we’re seeing those numbers pick up once again. So that, of course, the subscriber additions is so important to this future growth story when it comes to Peloton.
DAN ROBERTS: Hey, guys, it’s interesting to see this price target increase after a few days ago, we discussed a note on Tesla that was a price adjustment. And really, the only reasoning was, well, it just got so hot. The note that we discussed on Tesla, I believe at the end of last week, was saying all the fundamentals are great. We think the sales are great, batteries are great.
But the stock that just gotten a little overvalued and we think can reset. You would expect more to hear that about Peloton at this point, I would think, because it’s run so high. But I think this is a huge showing of faith that sales will continue.
Seana mentioned the fear here with shipments and keeping up with demand. That doesn’t really concern me, because as long as people are continuing to order and they’re not canceling their orders when they see how long it’s going to take to ship the bike, then that’s fine. It’s sort of– it’s a good problem to have.
Apparently, the company has also said that the shipment times are going to get much better soon. They originally said July, August. Now that’s being– that goal is being moved a little bit. But that’s fine. If demand is so high that the bikes are taking longer to ship, so be it.
I think the key here is the content, that untapped market. Anecdotally, I’ve heard recently from a number of friends who have said, oh, do you want to do a Peloton class tonight? Or I’m doing Peloton. And I say, well, I don’t have that.
And you say no, no, I don’t have the bike either. I just do the classes. So wow, I mean, I’d be interested to know what percent of subscribers to the service, the online subscription, aren’t even using a Peloton-brand bike. So I think that’s very interesting.
And then when we talk about only 5% of the TAM being addressed so far, I wonder if that eventually includes a much lower-cost model. I’m sure they want to keep their brand very premium. But if there are people who are only holding off because they think the bike is too expensive, could Peloton put out a much cheaper model that’s a little more bare bones and it still captures some people that way?
MELODY HAHM: Although it is interesting, Dan, our former colleague, actually, had interviewed the CEO of Peloton, John Foley, and he talked about how sales actually increased when the price was increased. And there was this sort of exclusivity component. It felt as though the scarcity model, that you had to be on the upper echelon to afford this. And, of course, to your point, that can only scale so far.
But initially, there was that bump after, I think, the price was doubled, maybe, or it was $1,000 added to the price. Of course, for those households that have discretionary income, that extra $1,000 may not mean much to them. So it is an interesting psychological sort of exercise of what price makes it seem more desirable.
My takeaway from this note is the product is good, right? It’s not convenient. It’s not cheap. It’s not where everyone is, because I’m just thinking about what are the common themes with Amazon? It’s convenient.
What about Snap? It’s where everyone is, where teens, you have to be on it to communicate with your folks– not your folks– your peers and send some ephemeral messages. So Peloton is distinctly different in my mind, because you are opting into the system. You clearly see immense value, whether it is that digital subscription or that really ridiculously priced bike or treadmill.
And I think, to Dan’s point about the anecdotal measurement, even last night, a have a family that we know actually moved from New York to LA. They have just started settling in. And they’re like oh, yeah, that’s where the Peloton is going to go. I’m like oh, is it on the way? They’re like no, we’re just allocating the space for that.
So the fact that it’s become so normalized that this is part of any household that makes six figures is really fascinating to me. And I think this trend, as JPMorgan points out, will only continue.
MYLES UDLAND: I guess the commercials worked.
MELODY HAHM: I know, I guess all those parodies and the Twitter dragging worked, right?
MYLES UDLAND: Yeah, I mean, it’s not– it’s not– it’s not a gym space. It’s now a Peloton space. Congrats to Peloton. They’ve branded part of a private home.
DAN ROBERTS: And guys, just one more bit of anecdata– I’m really thirsty for it, and Melody, maybe it’s already come out, but maybe we’ll get it eventually. It might take more years of studying and polling people on their behavior. But for us, the hesitation has been A, the price.
You mentioned that when they raised the price, they actually sold more. Great, but you’re not going to get me that way. I haven’t bought it because it’s too expensive.
But A, the price, and then B, my wife and I have talked about, well, we think– and maybe people can debate– but if you go ahead and buy this thing, well, that has to be your only workout. You’re not doing anything else then, because you’d better use it. And you’re not going to go out and take classes in a physical location, I mean, I guess, unless you’re working out every single day twice a day and you’re rich.
But I would think you buy this thing. This is your workout. And we’ve been hesitant for that to be the case. So I’d be interested eventually to know how many people who own the bike and subscribe and do the classes also do regularly scheduled outside-of-the-house classes, non-Peloton.
MYLES UDLAND: Yeah, all right, we gotta go. We should do a whole segment on this. But we have to go to break and move on. But I really like that line of inquiry, and I think it goes a number of very interesting different directions.