David Einhorn's bull case for Peloton

I've long followed fitness company Peloton Interactive (PTON)...

That's mainly because dozens of people I know – including my three daughters – are devotees of its exercise bikes and classes with charismatic fitness instructors.

But fortunately, I never bought Peloton's stock. It's down a staggering 96% from its all-time high of $167.42 per share in January 2021 during the "meme stock" bubble – though it has more than doubled in the past two and a half months, as you can see in this one-year price chart:

Peloton hit my radar screen last week when I saw that my friend David Einhorn pitched the beaten-down shares at the Robin Hood Investors Conference last Wednesday.

You've likely heard of David before – he's the manager of hedge fund Greenlight Capital, which he founded in 1996 and built to become one of the largest and best-known funds in the world. He's best known for his 2007 presentation predicting the fall of investment bank Lehman Brothers, which I covered in my July 2 e-mail.

David is one of the smartest investors I know, and he made a compelling pitch for Peloton, so let's take a look today (I'll also weave in a bit of my own analysis)...

He just posted his 30-slide presentation here, which includes a transcript of his commentary.

David started with an overview of the company's (and the stock's) boom and bust, which you can see in this slide:

David then showed Peloton's year-over-year growth rates by quarter for both revenue and net income in this slide:

I prefer to look at the raw numbers and, in this case, use operating income so as to exclude big one-time charges.

But it's a similar story: a huge boom in revenue followed by nearly as big of a bust, with profits plunging deep into the red... but now a recovery to almost breakeven. Take a look at Peloton's revenue and operating income going back to the start of 2018:

In fact, Peloton has now generated positive free cash flow ("FCF") during the past two quarters. You can see this in the below chart of the company's cash from operations, capital expenditures ("capex"), and FCF:

One reason David likes the business is because high-margin, recurring subscription revenue has grown to two-thirds of total revenue – here's the slide he shared:

David also thinks Peloton has huge opportunities to cut costs. When he compared it with eight other peer businesses, he discovered similar gross profits, but Peloton's SG&A (sales, general, and administrative costs, or overhead) were far higher, at 44.1% of sales versus only 25.2% for peer companies.

Here's his breakdown (in the table, note that "SBC" stands for stock-based compensation):

David doesn't think he needs to be an activist because the company has already "implemented an initial cost-cutting plan."

David concluded by saying that the company's guidance of $200 million to $250 million of adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA") for fiscal year 2025, which began in July, is much too low. As he argued in his presentation:

If we right-size the cost structure to the benchmark, there should be $400 million to $500 million of EBITDA from the current subscription revenue base.

Companies like this trade at 9 to 32 times EBITDA.

9 times $450 million of EBITDA implies a $7.50 share price.

32 times implies a $31.50 share price.

With PTON shares closing yesterday at $6.40, a move to $7.50 would be a 17% jump... and a move to $31.50 would be a massive 392% gain. That's a lot of potential upside.

It's a good sign for the stock when someone like David is bullish like this.

And the idea looks interesting enough that I'll take a closer look with my team here at Stansberry Research.

As always, if we decide it looks compelling enough to officially recommend, subscribers to our flagship Stansberry's Investment Advisory newsletter will be the first to know.

If you're not a subscriber already, learn how to become one – and put your name on the list to receive our next monthly issue with a new recommendation, which publishes this Friday after the market close – right here.

Best regards,

Whitney

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