There is a lot of pessimism hanging over Peloton stocks, which are poised to rapidly grow in the coming years, says a prominent Canadian investor.
The company is known for its stationary bikes and treadmills equipped with large touchscreens that stream instructor-led workouts. It reached an all-time stock price of US$171 during the pandemic in 2021, as the demand for at-home workouts increased during COVID-19 shutdowns.
But interest and demand quickly dropped post-pandemic, as the stock continued to fall, sitting at an all-time low of $3.65 two weeks ago.
However, “it’s not dying anytime soon,” Eric Jackson, founder and president of EMJ Capital, known for identifying high growth stocks.
Peloton shares soared 17 per cent on Friday after Jackson announced he is long on the stock, citing its strong free cash flow, potential for an AI-driven turnaround, and corporate wellness expansion.
On Tuesday midday, the share price sat over US$4.
“This is a stock that’s generating US$345 million in free cash flow in the last 12 months,” says Jackson.
“It has debt, but with that kind of free cash flow, it can easily manage that debt, and also its churn rate went down in the last quarter.”
The most important thing, he says, is that Peloton managed to retain its core base of subscribers who continue to support the company, despite investors selling their stocks.
“This could be a $40 plus stock in three, four or five years from now,” says Jackson.
Early to a turnaround
Some of the best investment opportunities come when you get in early to a turnaround, says Jackson.
Last year, Jackson tweeted his bullish thesis on OpenDoor, an online real estate company, while the stocks were US$ 0.73.
It surged over 1,600 per cent later in the year to US$10.87 before setting to US$4.65 mid-Tuesday.
“I mean, that tweet still today has about 500,000 impressions,” says Jackson stressing that his Peloton tweet hit one million views in 24 hours, which shows that people want to recognize the company and want to know more about it.
“Say what you want about Peloton problems over these last few years, but they have a brand,” says Jackson.
Similar to Carvana
Jackson compares Peloton’s stock drop to that of American car retailer Carvana, which saw a similar drastic decline during the pandemic before surging again.
Carvana’s stock plummeted from over US$370 in 2021 to US$3.55 in December 2022 before hitting a recent high of US$486. As of Tuesday midday, the price is US$307.
“I don’t think Peloton will be a 100-bagger, but I believe it has a clear path to four times over the next few years,” says Jackson.
Churn rate will determine the company’s future
He says the company’s churn rate, the speed at which customers cancel their subscriptions, is the most important metric in the coming months.
Jackson says the company’s upcoming earnings report in May will be the ultimate test to see if it can keep customers from leaving.
“If churn continues to go down, and they’re able to kind of show some top line growth, the stock will take off,” says Jackson.
He says Peloton’s story could be similar to Chewy, an online pet retailer with a subscription service that was once thought to be a COVID casualty. After a strong earnings report, Chewy’s stock was re-evaluated at a forward price to earnings of roughly 26 times earnings.
“I think that’s the model that you want to hope for a Peloton, and I don’t think they’re far away from that kind of reality,” says Jackson.
