Peloton Interactive (0.65%) seems to have captured much of the spotlight recently, particularly in the exercise sector. The company thrived before and during the pandemic, but in recent years, it has been fighting to stay afloat.
Investors responded positively to its latest financial report, suggesting that the company might be on the verge of a turnaround. However, if you’re contemplating purchasing this consumer discretionary stock at present, you might want to reconsider. A more promising fitness stock is available for investment in 2024.
A Look at Peloton
Following its recent earnings announcement, Peloton has sparked some optimism among investors. The company reported revenue of $643.6 million for its fiscal fourth quarter, which ended on June 30—a modest increase of 0.2% compared to the previous year. This slight uptick could indicate a stabilization, and the market’s enthusiasm is reflected in the stock’s significant rebound.
However, Peloton’s challenges are no secret. The company struggles to grow its subscriber base, achieve robust sales growth, and generate positive net income. Despite its stock trading at a low price-to-sales ratio of less than 0.7, Peloton remains a risky investment.
Consider Planet Fitness for Industry Exposure
While the pandemic initially benefited Peloton, it was a setback for Planet Fitness (0.18%), which had to temporarily close some locations to curb the virus’s spread. Before the health crisis, Planet Fitness was thriving; from its initial public offering in August 2015 to its pre-COVID peak in February 2020, its shares soared 450%. However, they have since experienced volatility, declining by 7% as of August 26.
Today, Planet Fitness is on stable ground. In 2023, revenue grew by 14.4%, driven by an 8.7% increase in system-wide same-store sales and the opening of 165 new fitness centers. In the first half of this year, sales rose by 7.9%. The company now boasts 19.7 million members and operates over 2,600 locations, primarily in the U.S.
The new leadership team sees ample room for expansion. “On the store growth side, as shown by two third-party studies last year, we believe we can double our footprint domestically to approximately 5,000 locations, up from the 4,000 target we set at our IPO in 2015,” CEO Colleen Keating stated during the Q2 2024 earnings call.
With its franchise model—only 259 locations are company-owned—Planet Fitness can tap into market opportunities through external investments. Franchisees, seeking a proven business model, are likely to invest in opening new locations, similar to McDonald’s (NYSE: MCD). This strategy ensures consistent profitability.
“The beauty of our asset-light franchise model is that it generates significant free cash flow,” CFO Tom Fitzgerald noted on the call. Indeed, Planet Fitness earned $84.3 million in net income over the past six months, a feat that continues to elude Peloton.
Planet Fitness has demonstrated its ability to achieve enduring success in a challenging industry. Consumers remain keen on affordable gym memberships, bolstering the company’s prospects. In contrast, Peloton risks being dismissed as a fleeting trend.
It’s important to note that Planet Fitness’s valuation may not be particularly enticing, as it trades at a price-to-earnings ratio of 45, nearly double that of the S&P 500.
In my view, Peloton remains a highly speculative stock to buy and hold. Although Planet Fitness is not without its flaws and its valuation isn’t exactly a bargain, it represents a more solid investment in the fitness industry for the coming years.
