Greenlight Capital’s Einhorn Sees Massive Upside in Peloton Stock
Hedge fund manager David Einhorn, head of Greenlight Capital, believes that Peloton Interactive (PTON) is significantly undervalued and has the potential to reach a share price as high as $31.50. This represents a fivefold increase from its current trading price, based on a compelling cost-cutting strategy outlined in a presentation at the Robin Hood Investors Conference. Einhorn’s bullish prediction hinges on Peloton’s ability to drastically reduce operational expenses, potentially doubling its current projected adjusted EBITDA. His presentation, delivered while riding a Peloton bike, cleverly juxtaposed the company’s past missteps with a vision for its future profitability, incorporating an interactive “stock pitch ride” format.
Key Takeaways: A Peloton Stock Revival?
- Significant Undervaluation: Einhorn argues that Peloton’s current share price drastically underestimates its potential value.
- Cost-Cutting Strategy: Peloton’s success depends heavily on achieving significant cost reductions, potentially doubling its adjusted EBITDA.
- High-Margin Subscription Business: Einhorn highlights Peloton’s high-margin subscription model as a key asset for future growth.
- Potential Share Price Surge: The projected share price increase, from around $6.20 to as high as $31.50, is based on a benchmark analysis of comparable companies.
- New Management Crucial: Einhorn believes that new leadership is essential to execute the cost-cutting strategy and unlock Peloton’s full potential.
Einhorn’s “Stock Pitch Ride”: Peloton’s Path to Profitability
Einhorn’s presentation at the Robin Hood Investors Conference wasn’t your typical investor pitch. Instead, he delivered his analysis while riding a Peloton bike, a visually striking choice emphasizing his core argument. The presentation, structured as a “15-minute ‘Stock Pitch Ride’,” included a leaderboard mimicking a real Peloton class, featuring prominent investors like Bill Ackman and Robin Hood CEO Richard Buery. This unconventional approach underscored the company’s fundamentally strong subscription-based model and its potential for a dramatic turnaround.
Benchmarking Peloton: A Comparative Analysis
Greenlight Capital conducted a comprehensive benchmark study comparing Peloton’s cost structure to three sets of peer companies: other fitness businesses (like Planet Fitness), consumer subscription companies (like Chewy), and digital subscription-based companies (like Spotify and Netflix).
This analysis revealed significant discrepancies. While Peloton has already implemented cost-cutting measures, its adjusted EBITDA remains near zero, contrasting sharply with the $406 million peer median. Einhorn highlights several areas for improvement, including:
- Excessive Research & Development (R&D): Peloton’s R&D spending is notably higher than competitors, even disproportionately so compared to companies with significantly larger sales, such as Adidas.
- High Stock-Based Compensation: Peloton’s stock-based compensation of $305 million in fiscal 2024 is double the peer median, despite being comparable to much larger companies like Spotify and Netflix.
The Power of Peloton’s Subscription Model: A High-Margin Opportunity
Despite these challenges, Einhorn emphasizes the significant potential of Peloton’s high-margin subscription business. In fiscal 2024, this segment generated $1.71 billion in revenue with an impressive 68% gross margin. His thesis centers on the idea that substantial cost reductions could dramatically boost free cash flow and EBITDA without the need for increased subscriber numbers or new product launches.
Unlocking Peloton’s Full Potential: The Need for Restructuring and New Leadership
Einhorn’s optimistic outlook isn’t solely dependent on Peloton’s existing cost-cutting initiatives. He acknowledges that the company has already taken steps to reduce expenses, including layoffs of 15% of its staff, closure of retail showrooms, and adjustments to international sales plans. While Peloton projects an adjusted EBITDA of $200 million to $250 million in fiscal 2025, Einhorn predicts that with further optimized cost structure, the company could achieve $400 million to $500 million. This, he argues, could lead to a substantial increase in the share price.
A crucial element of Einhorn’s strategy lies in getting new management in place. He believes that a renewed leadership team can help Peloton to achieve its full cost-cutting potential and ultimately, increase shareholder value. Peloton’s interim co-CEO has indicated that a new CEO will be in place by the time of their next earnings call.
The Future of Home Fitness and Peloton’s Long-Term Prospects
Einhorn’s assessment incorporates a positive outlook on the future of home fitness. He rejects the notion that the rise in popularity of home workouts is simply a passing trend. “
‘Working out in the comfort of your own home is not a fad,’” Einhorn stated.
This belief underscores his conviction that even with a resurgence in gym attendance, the demand for at-home fitness solutions, such as Peloton, is sustainable and growing. He further anticipates that consumer trends favoring healthier lifestyles and Peloton’s dedicated user base, with its $44 monthly subscription revenue, will act as catalysts for sustained long-term subscriber growth. This growth should not be seen as dependent on any new sales or marketing campaigns, but rather on the ongoing health of its current subscribers.
Conclusion: A High-Stakes Gamble with Significant Potential
David Einhorn’s bullish stance on Peloton is a high-stakes gamble, but one with a potentially immense payoff. The success of his thesis rests heavily on Peloton’s ability to dramatically cut its costs while maintaining its loyal customer base. The appointment of a new CEO with a proven track record adds to both the risk and reward scenarios. If Peloton can successfully execute its cost-reduction strategy, the projected rise in its share price could be nothing short of extraordinary.
