Peloton Interactive stock is up 473% year to date. Above, the Peloton Bike+.
Courtesy of Peloton
Text size
A connected-fitness cash grab is coming, and Rocky II just gave me a billion-dollar idea. There’s a scene where coach Mickey clutches a hen and snarls, “Chicken chasin’ is how we always used to train in the old days.”
Now hear me out. We secure seed funding from
Nike
and Purdue Farms, then geotag some birds, build tracking apps for smartphones and watches, and hire studio trainers to record inspiring Mickeyisms: “Ya catch this thing, ya can catch greased lightning,” and so on. By next fall, CLUX could be ringing the opening bell at Nasdaq.
OK, the pitch needs fine-tuning. It’s just that every form of exercise I can think of seems to be going online and striking it rich: cycling, rowing, yoga, lifting, and boxing. There are widespread reports of bellies expanding during quarantine, and many gyms remain closed. Vaccines are coming, which means that by summer, office workers could be seeing one another below the Zoom frame for the first time in more than a year.
At the same time, Wall Street beckons fitness start-ups. As recently as April,
Peloton Interactive
(ticker: PTON) was trading below its initial public offering price from seven months earlier. Now, the stock is up 473% year to date, valuing it at $47 billion.
Remember
Nautilus
(NLS)? A year ago, it was a collection of left-for-dead brands including Bowflex and Schwinn, trading at a dollar and change a share. This year, it’s up more than 1,000%, to a recent $21, for a market value of close to $640 million. A software upgrade has given Nautilus a Peloton shine. For $149 a year, or $99 a month, a service called JRNY uses artificial intelligence to personalize workouts. There are prerecorded trainer sessions and an app that can simulate runs through the Japanese countryside or Scottish highlands.
Most of Nautilus’ new machines will connect to its online platform by the end of January, versus a low-single digit percentage two years ago, according to William Blair analyst Sharon Zackfia, who initiated coverage of Nautilus with an Outperform rating in early September, when it was under $12 a share. She reckons every 100,000 subscribers will add 30 cents to yearly earnings per share, even if product investments will cause earnings to dip to $1.86 in 2021 from an estimated $2.32 a share this year.
Steve Dyer, who covers Nautilus for Craig-Hallum Capital Group, calls the home-fitness shift structural, rather than only pandemic-related, and sees Nautilus hitting $28 a share in the near term. Meeting demand will be one key. The company is adding capacity for bikes and strength machines and recently brought on a second supplier for SelectTech—a dumbbell brand with its own smartphone app.
Peloton isn’t taking this competitive flex sitting down. This past week, it agreed to pay $420 million for Precor, which makes strength machines and more for homes, gyms, and hotels. This will give Peloton an inroad to big customers like the no-frills gym chain
Planet Fitness
(PLNT) and, perhaps more important for now, its first U.S. manufacturing presence—625,000 square feet in North Carolina and Washington state.
Investors are rapturous. Peloton stock rose 12% the day after the Precor announcement, adding 10 times the deal price to the company’s market value. If that math makes sense, there’s more where it came from: 85% of analysts who cover Peloton recommend buying shares, even though the stock price is now 13% above the average target price.
For now, Peloton is only thinly profitable. It trades at 10.4 times projected revenue for calendar 2021, versus 1.2 times for Nautilus. MKM Partners analyst Rohit Kulkarni, who has a Neutral rating on Peloton, cites as risks rising competition from Big Tech and private companies.
Alphabet
(GOOGL) recently gained approval from the European Commission to buy Fitbit, which makes fitness tracking bands.
Apple
(AAPL) this month launched Fitness+, which turns its phones and watches into workout companions. In August, Amazon.com (AMZN) launched its own fitness band, called Halo. And
Facebook
(FB) has Instagram, a shame-based motivational service featuring images of the slim and active.
Private players, meanwhile, have also swarmed to connected fitness. A summer funding round valued Hydrow for rowing at more than $100 million. FightCamp, by a company called Hykso, combines heavy bags, online videos, and punch counters—no chickens yet. There’s Echelon, which caused Peloton stock to dive when it announced a cheap “Prime” smart bike sold by Amazon, although it has since abandoned that name and made clear that it isn’t partners with the e-commerce giant. Mirror, which sells a big screen for workouts from kettlebell to Latin dance, was sold earlier this year to
Lululemon Athletica
(LULU).
Among the most promising of the private players is ICON Health and Fitness, which owns NordicTrack and a fitness software platform called iFit, with 700,000 paid subscribers. An October funding round valued ICON at $7 billion.
There are many companies like these, and the experience of Peloton and Nautilus shares will tempt them to go public while prices and paunches remain this plump. But the opening-day price pops will pay off only for early investors. For the rest of us, the choice is among already-listed companies that still look reasonably priced, like maybe Nautilus; or indirect exposure, like with Lululemon; or even less direct exposure, through Big Tech. Fitness+ could help drive subscriptions to Apple’s top service bundle, called Apple One. Wedbush Securities analyst Daniel Ives estimates service revenue for Apple could hit $65 billion this fiscal year. He values services alone at $1 trillion.
Or there’s always the entrepreneurial route: find old exercises that haven’t yet been given an online upgrade. Come to think of it, forget Rocky II. I just noticed the ticker OOF is still available, and I have an idea for connected medicine balls.
Write to Jack Hough at [email protected]. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.
