Peloton Interactive(NASDAQ: PTON) seems to get all the attention these days, at least when it comes to the exercise industry. It thrived before and during the pandemic. But in the past couple of years, the business has been fighting for its survival.
Its most recent financial update was cheered by investors, as maybe things will start to trend in the right direction. If you're considering buying this consumer discretionary stock right now, though, think again. There's a better fitness stock to buy in 2024.
The perspective on Peloton
Investors might be bullish on Peloton after its latest earnings report. Revenue of $643.6 million in its fiscal fourth quarter (ended June 30) was a tiny 0.2% higher than in the year-ago period. This could be a sign that things are stabilizing. Perhaps this is exactly what the market is thinking, given the stock's huge bounce.
But the company's struggles have been widely publicized. Peloton continues to have trouble adding subscribers, posting healthy sales growth, and registering positive net income. Despite the stock trading at a cheap price-to-sales ratio of under 0.7, this is a business to avoid like the plague.
Buy Planet Fitness if you want industry exposure
The pandemic was a boon for Peloton, but it was a disaster for Planet Fitness(NYSE: PLNT), which was forced to temporarily shutter some of its locations to stop the spread of the coronavirus. The business was flourishing before the health crisis. Between the company's initial public offering in August 2015 and the pre-COVID high in February 2020, shares skyrocketed 450% higher. But since then, they have been on a volatile journey, dropping 7% (as of Aug. 26).
Planet Fitness is on solid footing today. Revenue increased 14.4% in 2023, boosted by 8.7% systemwide same-store sales growth and 165 new fitness centers being opened. Through the first six months this year, sales were up 7.9%. The business now has 19.7 million members and operates more than 2,600 locations that are primarily in the U.S.
The new leadership team believes the expansionary runway is massive. "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 said on the Q2 2024 earnings call.
Since Planet Fitness operates a franchise model (only 259 are company-owned), it will be able to penetrate its market opportunity on the investments of outsiders. Franchisees looking for a proven business idea will put money behind opening new Planet Fitness locations, similar to how McDonald's(NYSE: MCD) operates. This results in consistent profitability.
"The beauty of our asset-light franchise model is that it generates significant free cash flow," CFO Tom Fitzgerald said on the call. What's more, Planet Fitness raked in $84.3 million in net income in the last six months. This is something Peloton continues to struggle mightily to achieve.
Planet Fitness has shown that it can find lasting success in a difficult industry. Consumers seem to still be very interested in signing up for gym memberships, especially ones that are this affordable. On the other hand, Peloton is showing that it might simply be another fad.
To be clear, Planet Fitness' valuation isn't that compelling. It trades a price-to-earnings ratio of 45. That's almost twice the multiple of the S&P 500.
Peloton is still an extremely risky stock to buy and hold, in my opinion. Planet Fitness is by no means perfect, and its valuation doesn't scream "bargain," but it's the better exercise business to own for the next few years.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Peloton Interactive and Planet Fitness. The Motley Fool has a disclosure policy.
