platoon (NASDAQ: PTON) stock has been a huge winner during COVID-19 lockdowns over the past year. It has grown by over 250% at one point in the past 12 months, and investors have been betting heavily on the success of the home fitness and lifestyle brand.

However, over the past few months, a combination of bad news for the company and investor favor for shying away from pandemic market leaders have caused Peloton stock to fall 40% from its annual high. With stocks at a relative discount, is it time to buy Peloton stocks? We will take a look.

What happened

There’s probably not just one reason why investors have deteriorated on Peloton, but the recent sale correlates well with the rollout of the COVID-19 vaccine in the United States. This indicates that overall, many investors believe Peloton has only received a temporary boost from the pandemic, which is coming to an end with the economy reopening. As a result, its revenue growth will take a hit in the near future.

Along with this change in sentiment, Peloton announced in its latest earnings call that it is launching a voluntary recall of the Tread and Tread + (its premium treadmill offerings) after a child has been killed using the equipment. The news sounded bad and sent the stock down nearly $ 80 per share, a 45% drop since the start of the year. However, these treadmills represent only a small part of Peloton’s business, and the recall is expected to have a limited effect on its finances. Management estimates that it will see an impact of $ 165 million on revenue from the recall. For reference, the company generated $ 3.69 billion in revenue over the past 12 months.

The company is doing well

The bearish narrative is that Peloton’s business is dependent on the COVID-19 pandemic and stay-at-home mandates to grow. But when you look at the company’s track record, the company has done well with a fully open economy, brutal lockdowns, and anywhere in between. For example, sales have steadily increased by around 100% per year in the years leading up to 2020.

Coming to more recent numbers, in the fiscal third quarter (which ended March 31), revenue increased 141% year-over-year to $ 1.26 billion. Management expects revenue of $ 915 million for the current quarter, which would represent 50% growth over the period of the previous year. The forecast was lower than analysts’ average estimate, but as long-term investors we know that missing a quarter of Wall Street’s forecast doesn’t make or break a business.

Peloton is also experiencing significant growth in the higher margin areas of its operations. During the last quarter, Total Connected Fitness subscriptions increased 135% to 2.08 million, and paid digital subscriptions increased 404% to 891,000. Investors in Peloton are expected to closely follow the growth of paid subscriptions because they bring a higher margin and more consistent revenue stream to the business.

For example, hardware gross margin was only 28.4% (typically slightly higher but suffered from supply chain constraints) in the third fiscal quarter, while subscriptions gross margin was 64.6% with a gross margin growing 172% to reach 154.5 million dollars. Since fitness equipment typically only needs to be purchased once, over time more and more of Peloton’s profits will come from its subscriptions.

An interesting new acquisition

In April, Peloton closed its acquisition of fitness equipment company Precor for $ 420 million in cash. Crazy John Quast pointed out two reasons Peloton decided to team up with Precor.

First, the purchase will give Peloton an immediate manufacturing boost. With years of experience and established facilities in the United States, Precor can help Peloton solve some of the supply chain issues that have plagued the business recently. Management also announced that it will invest $ 400 million to build a manufacturing facility in Ohio that will meet all of Peloton’s demand in North America by 2023. With the addition of Precor and this new investment in the manufacturing, Peloton is preparing to have a more resilient supply chain. .

The other benefit of acquiring Precor is that it gives Peloton a major breakthrough in more common environments such as hotels and apartments where Precor already has a major presence. This will help increase the value proposition for existing members by allowing them to access Peloton workouts when not at home and will also serve as a customer acquisition tool for non-Peloton users who can try. the product.

Stock is still not cheap

Even though stocks have fallen more than 30% since the start of the year, Peloton stocks are not cheap. Its market cap stands at around $ 31 billion at the time of writing, and with around $ 4 billion in annual sales (assuming the company hits its latest guidance for the fourth quarter), the stock has a price / sales (P / S) ratio. from 7.8. This may seem cheap compared to some tech stocks, but investors should remember that the company does not have a proven track record of profitability and the low gross margin in its computer hardware business can inhibit its bottom line profit. long term and its free cash flow. margins.

That being said, if you think Peloton can continue to grow digital subscribers at a rapid rate over the next several years, a market cap of $ 31 billion may seem cheap in five or 10 years. Peloton doesn’t look like a garish buy here, but investors shouldn’t sell just because of the recent declines.