Bank of America Upgrades Peloton

Bank of America (BofA) has upgraded Peloton (NASDAQ: PTON) from Underperform to Buy with a new price target of $9, up from $3.75, citing strong EBITDA growth under CEO Peter Stern, who begins in January.

BofA analysts believe Peloton's profitability is improving due to cut costs, strategic growth initiatives, and an effective leadership team. In the first fiscal quarter, Peloton reported a stronger-than-expected EBITDA, prompting management to revise its full-year forecast to $240-290 million, surpassing the market's $232 million prediction.

Analysts predict Peloton could achieve over $300 million in EBITDA this year, with a potential for $400 million or more in upcoming years due to expense reductions, improved hardware margins, and subscription price hikes, leading to double-digit EBITDA growth.

Peloton faces subscriber retention issues, with a monthly churn rate of 1.6%, above the peer average. However, it plans to address this through a stronger emphasis on treadmills, which are experiencing higher demand than bikes, and targeted marketing for male customers.

Peloton is enhancing its retail presence, partnering with Costco for the holiday season. BofA anticipates Peloton evolving from a cash-burning phase to a focus on debt reduction, raising free cash flow expectations for FY25 to $125 million, up from $75 million, while noting Peloton's cash reserves stand at $722 million.

The upgraded financial outlook supports debt reduction and future growth. BofA also highlights CEO Peter Stern's relevant experience in consumer software, which is aligned with Peloton's strategic goals and overall objectives, as noted by his performance-based compensation alignment with long-term objectives.