Recently, connected-fitness company Peloton Interactive (NASDAQ:PTON) shocked Wall Street with a surprise $420 million acquisition of fellow fitness company Precor. The acquisition was Peloton's largest, sending investors rushing to gobble up shares and analysts scrambling to adjust price targets.
With acquisitions, there's a lot that can go wrong. Companies can overpay for their target, leading to future writedown charges. Companies can also fail to merge operations efficiently. Because of things like this, it's good for investors to patiently wait to see how things start playing out before getting too excited. That said, I believe Peloton's acquisition of Precor can help its business in two ways, possibly giving the stock significant long-term upside.
Image source: Peloton Interactive.
1. An improved supply chain
Peloton had its initial public offering (IPO) before the COVID-19 pandemic caused its business to boom. Going into fiscal 2020, the company's outlook didn't account for what was about to happen. It was expecting to end fiscal 2020 with 885,000 to 895,000 connected-fitness subscribers (74% year-over-year growth at the midpoint) and full-year revenue of $1.45 billion to $1.50 billion (61% year-over-year growth at the midpoint).
In reality, Peloton finished fiscal 2020 (ended June 30) with 1.09 million connected-fitness subscribers for 113% year-over-year growth. And it generated full-year revenue of $1.8 billion -- up 100% year over year and massively outperforming the expectations from the start of the year.
While this growth is spectacular, it came at a cost for Peloton. Its supply chain wasn't ready to handle this growth, leading to long wait times for potential customers. According to The Wall Street Journal, the wait became unacceptably long for some, perhaps to the benefit of Peloton competitors like Nautilus.
After years of declines, the COVID-19 pandemic reignited growth for Nautilus. PTON Revenue (TTM) data by YCharts.
Headed into calendar 2021, Peloton has four hardware products: a premium and base-model treadmill, and a premium and base-model stationary bike. Of these, Peloton's management expects the base-model stationary bike, simply named Bike, to be the best-seller in the coming year. Therefore, recent manufacturing improvements have addressed Bike supply, and it believes Bike deliveries are now back to normal.
However, Peloton's premium stationary bike, the Bike+, still can't keep up with consumer demand. This problem is why the company's acquisition of Precor is a good thing. The company will now have 625,000 additional square feet of manufacturing capability. And these facilities are in the U.S., allowing for quicker delivery to Peloton's U.S.-based customers.
Hopefully soon, supply will completely catch back up to demand, so Peloton doesn't cede any market share to competitors unnecessarily.
2. An expanded addressable market
Recently, Peloton set an audacious goal of someday having 100 million members. I wouldn't bet against this team, but that's a really big goal, especially if you're only targeting individual households. However, Precor's business has a large commercial customer base (hotels, colleges, local gyms, etc.), and this expands Peloton's addressable market.
We still lack details about how this could all work; that's something to watch for in upcoming quarterly updates. However, imagine owning Peloton hardware at home but being able to log in to your account from a hotel or local gym and continue your daily workout regimen. This potentially makes the notion of Peloton ownership more compelling.
There's also potential for operational synergies between Peloton and Precor. For example, Precor's equipment has some gamification features and tracking metrics made possible through a partnership with Spivi. While we don't yet know the future of its relationship to Spivi (a digital workout platform providing an interactive experience), one would expect some financial savings by using Peloton's software and content moving forward.
With an expanding addressable market, Peloton's audacious goal of 100 million subscribers suddenly sounds a lot less crazy.
Image source: Getty Images.
Can Peloton stock double from here?
By acquiring Precor, Peloton is expanding both manufacturing capabilities and addressable market. And that's a fundamental business improvement that could cause its stocks to double. Of course, I make no prediction about how long it will take to double from here. However, I will make this prediction: Peloton may be up almost 500% in 2020, but that's very unlikely to happen next year.
For some perspective, this has been an extremely unusual year for stocks. For example, consider the S&P 500 -- 500 of the largest U.S. companies. According to Finviz.com, eight of these stocks doubled in 2020! That's rare.
Likewise, Peloton enjoyed a year of historic returns that won't be easily replicated. However, if the company can continue executing on its business plan as it has, it can create shareholder value over the years and decades to come. I don't know how long it will take to double from here, but I do know Peloton's business (and therefore its outlook) improved by acquiring Precor.
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