Peloton Interactive, Inc. (PTON) and Lululemon Athletica inc. (LULU) are two of the world’s leading companies in the fitness space. PTON is an interactive fitness platform offering connected, technology-enabled fitness and streaming of instructor-led boutique classes to its members. LULU is a designer, distributor, and retailer of lifestyle inspired athletic apparel and accessories for a healthy lifestyle.

PTON operates through three segments — connected fitness product segment, subscription segment, and another segment. LULU operates through the following two segments — corporate-owned stores and direct-to-consumer. As people have taken to in-house fitness activities to comply with the “new normal,” both PTON and LULU have been witnessing significant growth in revenues and earnings. And investors have bid up these stocks as well.

While PTON returned 265.6% over the past year, LULU gained 47.7%. In terms of year-to-date performance, PTON is a clear winner with 312.3% returns versus LULU’s 48.6%. But which of these stocks is a better growth pick now? Let’s find out.

Latest Movements

On November 10th, PTON announced a broad, multi-year partnership with Beyoncé. They worked closely to create a series of themed workout experiences. They are also giving two-year Peloton Digital memberships to students at 10 Historically Black Colleges and Universities (HBCUs), providing access to a full library of fitness classes through the Peloton App that can be used with or without equipment.

The company announced the introduction of the Peloton Bike+ and the new Peloton Tread in September. The Bike+ is available since September 9th, while the Peloton Tread is expected to be available in the United Kingdom from December 26th and in the United States and Canada, in early 2021. On September 1st, PTON announced the formation of the Peloton Health and Wellness Advisory Council, its first-ever health and wellness advisory council.

PTON and Chase, the United States consumer and commercial banking business of JP Morgan Chase & Co. (JPM), entered a partnership in November, to offer Sapphire cardholders up to $120 in statement credits toward Peloton digital and all-access memberships.

LULU launched MIRROR in its stores in November. MIRROR offers a unique and versatile platform to continue to elevate the company’s Omni guest experience and digital sweat life offerings. Following its in-store availability in 18 stores across the United States, a new suite of MIRROR features is also expected to be rolled out to the full member base later this holiday season.

The company has been expanding its product assortment in the self-care category with the newest addition of Super Fine Face Mist on September 29th. LULU introduced Ice-Dyed Nulux, featuring an innovative dye technique for its proprietary performance fabric, Nulux. The company promoted Meghan Frank to the Chief Financial Officer role effective November 23rd.

Recent Financial Results

PTON’s revenue surged 232.4% year-over-year to $757.9 million for the third quarter ended September 2020, driven by strong demand for its Bike and Bike+, the full resumption of Tread+ sales, and sustained low churn levels.

PTON’s subscription revenues increased 132.9% year-over-year to $156.5 million. Paid digital subscriptions increased 382% year-over-year to more than 510,000. Gross profit increased 212.7% year-over-year to $328.7 million. EPS of $0.20 surpassed the consensus estimate by 81.8%.

LULU’s revenue for the quarter ended in October 2020 increased 22% year-over-year to $1.1 billion. While revenue from North America increased 19% year-over-year, revenue from the international segment increased by 21% year-over-year. Total comparable sales increased by 19% year-over-year. Gross profit increased by 24.2% year-over-year to $627.4 million. EPS of $1.16 surpassed the consensus estimate by 31.8%.

Past and Expected Financial Performance

PTON’s revenue increased by 128.5% over the past year. The market expects the company’s revenue to increase by 115.7% in 2021, and 32.9% in 2022. PTON’s EPS is expected to grow 140% for the current quarter ending December 2020, 115% for the quarter ending March 2021, and 102.9% in 2022.

On the other hand, LULU’s revenue increased by 8.6% over the past year. The market expects LULU’s revenue to increase by 7.9% in 2021, and 25.4% in 2022. The company’s EPS is expected to grow 9.6% for the current quarter ending January 2021, 281.8% for the quarter ending April 2021, and 47.5% in 2022.

Thus, PTON has an edge over LULU here.

Profitability

LULU’s trailing-12-month revenue is 1.72 times what PTON generates. Moreover, LULU is more profitable with a gross margin of 55.6% versus PTON’s 45%.

Also, LULU’s ROE and ROA of 29.23% and 14.75% compare favorably with PTON’s 2.81% and 2.11% respectively.

Valuation

In terms of trailing 12-month price/sales, PTON is currently trading at 14.09x, 27.9% more expensive than LULU which is currently trading at 11.02x. Moreover, PTON is more expensive in terms of EV/Sales (13.94x versus 11.10x).

However, in terms of trailing-12-month price/cash flow, LULU’s 68.04x is 51.9% higher than PTON’s 44.80x.

POWR Ratings

Both PTON and LULU are rated “Buy” in our proprietary POWR Ratings system. Here’s how the four components of overall POWR Rating are graded for PTON and LULU:

PTON has an “A” for Trade Grade, a “B” for Peer Grade, and Industry Rank, and a “C” for Buy & Hold Grade. It is currently ranked #10 out of 34 stocks in the Consumer Goods industry.

LULU holds an “A” for Trade Grade, and a “B” for Buy & Hold Grade, Peer Grade, and Industry Rank. It is currently ranked #15 out of 65 stocks in the Fashion & Luxury industry.

The Winner

Both PTON and LULU are good investment bets considering their market dominance and continued expansion. However, PTON appears to be a better buy despite trading at a marginally higher valuation based on its higher revenue and earnings growth potential.

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PTON shares were trading at $120.41 per share on Monday morning, up $3.31 (+2.83%). Year-to-date, PTON has gained 323.98%, versus a 16.40% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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