Peloton’s new camera-based ’Guide’ strength training device will go on sale this week, as the company looks to reduce its reliance on its indoor exercise bikes and treadmills and bolster declining revenues. While Peloton initially advertised the product at $495 when it was unveiled back in November, it has now cut pricing to about $295 at launch. The subscription plans required to go with the Guide will also be cheaper than Peloton’s bikes, costing $24 through this year, instead of the usual $39 that Peloton’s connected fitness subscribers pay. The recent pricing moves indicate that Peloton is open to forgoing some upfront hardware-related revenues in favor of more content and subscriptions sales.

This makes sense for a couple of reasons. Subscription revenues have thicker gross margins (about 70% in Q2) and revenues are also recurring and much more predictable, with its users remaining highly loyal. For perspective, connected subscriber churn – which is a measure of the percentage of users that leave each month – stood at a mere 0.79% in Q2. Hardware sales in comparison have been volatile, declining by about 8% year-over-year in the last quarter, with gross margins also coming in below 10%. Peloton has already cut the price of its entry-level bikes to just $1,495 in a bid to get more people onto its platform and it’s likely that the Guide device, with its lower price point and largely positive reviews, could help the company bolster its user base further.

Now, dispute the recent developments, Peloton stock has actually declined by about 13% over the last week amid fears in the broader market that the Federal Reserve could take a more aggressive approach to interest rate hikes. The stock also remains down by about 27% year-to-date and by over 80% from all-time highs, driven by Peloton’s surprise guidance cut last year and lower interest in at-home fitness as people head back to gyms as the pandemic eases. However, post the massive sell-off, we see a lot of value in Peloton stock.

At the market price of about $26 per share, Peloton stock is trading well below pre-Covid levels, and also below its 2019 IPO price of $29. However, Peloton has actually made quite a bit of progress since then. The brand has become a household name of sorts and Peloton has also grown its lucrative base of connected fitness subscribers by almost 4x from pre-pandemic levels to about 2.8 million. Despite this, Peloton is valued at under 2.5x projected revenues currently, compared to over 6x pre-pandemic. Now, although sales are likely to decline in FY’22, the markets aren’t pricing in a longer-term decline, with consensus pointing to close to 10% growth in FY’23. Moreover, as Peloton continues to raise its mix of subscription revenues (which stood at 33% of total revenue in H1 FY’22, up from 20% in H1’21), investors could potentially re-value the stock higher.

We estimate Peloton’s Valuation to be around $50 per share which is well ahead of the current market price. Check out our analysis on Peloton Revenues: How Does Peloton Make Money for a closer look at Peloton’s business model, key revenue streams, and how they have been trending.

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