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Interactive fitness player Peloton (NASDAQ: PTON), which is best known for its connected bikes, treadmills, and fitness content, emerged a big winner of the Covid-19 pandemic, as people opted to work out from home, instead of visiting gyms and spin classes. However, mega-cap computing titan Apple (NASDAQ: AAPL) has also been looking to play a larger role in the fitness space with its wearables such as the Apple Watch and digital services such as Apple Fitness+. So which stock is a better bet for investors? We think Peloton has more longer-term upside, given its lower valuation multiples (the stock trades at about 5.9x trailing revenue, versus about 7x for Apple) and its stronger long-term growth rates. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking more closely at historical revenue growth as well as operating margin growth and financial risk. Our dashboard Peloton Interactive vs Apple: Which Stock Is Better Play On The At Home Fitness Trend? has more details on this. Parts of the analysis are summarized below.
1. Peloton’s Revenue Growth Has Been Stronger
Peloton, with revenue of $4 billion over the last 12 months, is a baby compared to Apple, which posted revenues of over $347 billion over the last 12 months. However, Peloton’s growth has been much stronger, with sales rising 54% year-over-year over the most recent quarter (Q4 FY’21) to about $937 million, driven by relatively strong demand for its fitness equipment and its investments in bolstering its supply chain. In comparison, Apple’s sales rose by 36%, driven by stronger demand for computing products, digital services, and wearables. Peloton’s average historical growth rate has also been higher and more consistent. For instance, Peloton has roughly doubled its revenues every year over the last three years, while Apple has grown revenue at a compounded rate of 6% over the last three fiscal years.
Looking forward, Peloton revenues are estimated to grow 30% y-o-y to $5.2 billion in 2022. However, Apple revenue growth is likely to accelerate in FY’21, rising by about 33% to about $366 billion, driven by robust uptake for its 5G iPhones and stronger demand for computing products such as the Mac and iPad following the Covid-19 pandemic. However, we expect Peloton’s average growth rates to remain higher than Apple’s over the medium to long term.
Revenue Comparison – PTON vs. AAPL
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2. Apple Has Thicker Margins, But Peloton Has More Scope For Improvement
Peloton remains loss-making, with its operating margins standing at about -5% over the last fiscal year, although its gross margins stood at a relatively strong 36%. On the other hand, Apple has among the highest margins in the consumer electronics industry due to its premium products and strong pricing power, with operating margins of about 29% for the trailing twelve months, with gross margins standing at about 41%. Now both companies have made some progress with improving their margins in recent years. Apple has improved margins from around 26.7% in 2018 to about 28.8% in 2021, while Peloton has seen its operating margins rise from around -11% to around -4.6%.
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Looking ahead, Peloton is likely to see some margin pressure in the near term, on account of higher marketing spending and lower price realizations on some products due to recent price cuts. Apple, too, could see some pressure due to the ongoing semiconductor shortage. That said, we still think that Peloton’s operating margins have more upside in the long-term as fixed cost absorption improves as revenues scale up.
The Net of It All
The Apple story is simple. Customers buy an iDevice, get hooked to Apple’s device and services ecosystem, and keep coming back to the company for more, powering its cash machine. While Apple stock has become more expensive lately on a relative basis with its P/S multiple rising from 2.5x levels in 2018 to about 7x currently, the company’s business model promises durable (albeit a bit volatile) growth and steady returns for investors in the form of buybacks and dividends. Peloton, too, is looking at a similar business model, as it sells pricey, yet desirable, fitness equipment and gets customers to pay monthly for its subscription services. However, we think Peloton is the better growth pick, given its lower revenue multiple versus Apple (5.9x versus 7x), its stronger recent revenue growth, and its improving margins. Moreover, Peloton stock remains down by about -42% since mid-January, potentially presenting a good entry point for investors, compared to Apple stock which is up by almost 15% year-to-date.
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