Peloton price target raised to ‘Street High' $96 at Goldman, sees demand inflection as permanent

Goldman Sachs raised their price target for Peloton to a ‘Street High’ $96 per share, up from $84 per share. Goldman Sachs stated that along with the absence of any material marketing spending, its weeks-long order backlog has persisted through the pandemic. The Final Round panel breaks down the details.

Video Transcript

MYLES UDLAND: All right, welcome back to "The Final Round" here on Yahoo Finance. It's time now for our Call of the Day. Today we are talking about Goldman Sachs' latest note on shares of Peloton. The firm maintaining a buy rating or raising their price target on the stock to $96 a share from $84 a share. And talking about a theme we've heard with Peloton from a number of analysts, which is steepening the adoption curve and basically expanding our favorite concept here on "The Final Round"-- the company's potential TAM.

Now Seana Smith, you're still waiting for your Peloton. I guess that means that the curve is steepening for them. But it would seem that even with, in the tri-state area here, the local concern, gyms starting to reopen, it does seem that way more people than probably even Peloton thought are now assuming they will just work out at home for the rest of their lives.

SEANA SMITH: Yeah, Myles, I think that's exactly right. Because I remember when we were talking about this a couple of months ago when gyms initially started to reopen in some other areas across the country, there was this thought that people would be-- they would be so excited to go back to the gym. They just couldn't wait to get out of their house.

Yeah, sure, some people did. And that was the case. But I think the majority of people are still very hesitant at least to work out alongside somebody else before we have a vaccine.

So when you take a look at what's happening to Peloton-- what's happened to Peloton, I should say, in the past six months-- I mean, it's pretty remarkable. But Goldman, despite the fact that this is the stock that started the year in the high 20s, right now it's in the high 70s, Goldman thinks it's going all the way to $96 a share. They still see considerable upside to the share price. All that has to do with demand and the fact that demand has been sticking.

So Goldman Sachs out with a couple of estimates here that caught my attention. They actually expect net adds of 208,000 in its current fiscal fourth quarter. We're going to get those numbers here next month.

But I think that's going to be interesting, just in terms of how big of a jump that is, not only from a quarter-over-quarter, but from a year ago and the that they think Peloton will be able to continue to grow at this type of rate. Now, the elevated demand throughout the quarter, that sticks out to me, and the fact that we haven't really seen a huge downward movement in terms of the wait time for the bikes. Because bikes in this area, it still takes 10 to 12 weeks. In other areas of the country, six to eight weeks.

So the fact that they haven't been able to tackle that supply issue I think is certainly going to be on the top of mind for a lot of analysts on this call. And it will be interesting when we do hear from executives regarding that, because last quarter in the earnings call, they discussed the fact that they were upping their production, that they basically had doubled their capacity in June relative to what they had in early March. Yet they are still far behind.

So they need to scale up production. So I'm curious just in terms of how Peloton plans to do that, because I think that that is one area that they need to address. And they need to address it pretty quickly.

DAN ROBERTS: And guys, if I may, something I appreciated in this note was that early on in the pandemic when Peloton stock was just surging and it was one of the big stay-at-home trades and we talked about a couple of notes that were trying to throw a little cold water on the sales surge, because those notes were saying, well, we're nervous about a pull forward in demand. That is, people are ordering bikes now and they won't be ordering them later. There's just going to be a little bump right now and it will be short lived, and it'll only be because of the pandemic.

Well, here is Goldman, saying specifically-- I want to read this line-- "this isn't simply pull forward, but rather an acceleration and steepening of the adoption curve, as network effects are amplified." In other words, why assume that this is just a pandemic bump? And I've said similar things about the mega eye-popping online sales percentage bumps that we've seen from retail chains, like Walmart, Target, and yesterday Dick's and Best Buy. I think it's the same thing. I think you'd be shortsighted to assume this is only the pandemic effect.

And Myles, you mentioned in your intro, well, a lot of people are assuming they're going to be working from home permanently. I don't think that's necessarily it. I think, as Seana said, people are figuring that even once they've reemerged and they return to their office, they're not going to be so fast to return to a gym and be close to a stranger. And in some ways, they're seeing the appeal of staying at home and working out at home.

I haven't done it yet. The price is a little cost prohibitive. Maybe at some point they'll offer a new kind of cheaper tier. Because even once you buy the expensive bike, then you're paying for the classes. But clearly, they are winning over a ton of people at this time.

And I don't think you can chalk it up to a short-lived thing. But time will tell, right? Let's see how many bikes they're selling in two years.

MELODY HAHM: And I think there's just too much inconsistency and whip-lashing that's happening, right, for a lot of folks who did dip their toe into the physical gym. I can tell you here in Los Angeles, it was are they open? Aren't they open? 50% capacity? OK, 75% capacity? So for those who are just deciding on their own, hey it's better to carve out that 45 minutes and work out at home, whether that is through Peloton or another over-the-top service, that makes a lot of sense.

I want to point out that digital subscription business in particular in this Goldman note, analysts are pointing out at the $13 price point for a single user, that's the big growth opportunity, of course, in addition to the multi-thousand dollar bike and the treadmill that seem to be back-ordered at this point. And if you look at even the chart that they lay out, it's interesting to see the spike happened in the week of April 20. And then it sort of was a steady decline when it came to app downloads, where people were actually just doing one-off workouts, wanted to give out a 90-day trial.

And then you start to see that demand pick back up kind of at the latter end of June. And now it's been steadily increasing, as, to summarize what we've all been saying, people are starting to normalize that this is the new reality. And perhaps this is the way that they can invest in their health going forward.

MYLES UDLAND: Yeah, and just to that chart that you're speaking to, Melody-- I mean, every week since-- I guess this is what, the first week of March, Peloton has had year-over-year app downloads in excess of 100%, save for Memorial Day week. So it's pretty much been up and to the right all year. And so even with that moderation, you are still looking at 80%, 90% growth over the prior year. And to Goldman's point and to the point of many analysts that we've heard from on this over the last couple of weeks, it really has changed the entire possible world, I guess we could say, that had been previously conceived for just how large an opportunity this could be for Peloton.