Peloton stock mixed after Costco deal, here’s what the market is overlooking

Market had a confused reaction to the report of Peloton-Costco deal.

The stock went up pre-market, down after market open, then up again a few hours into the trading session.

There seems to be some negativity surrounding the deal, especially related to profit margins, which has irked some investors.

As the holiday season kicks off on the 1st of November, Costco members will find an exclusive Bike+ bundle at over 300 locations in the US. The offer will run till 15th February 2025.

Peleton’s Bike+ is a self-assembly equipment that is expected to sell for $1,999 at Costco stores.

It comes with a 48-month warranty as well. The bike typically sells for $2,500.

The 25% discount available to Costco members is a great value, but there are concerns over how it will affect PTON’s financials.

Concerns regarding the deal

Analysts fear that offering such a huge discount will erode the company’s margins.

To put this in context, PTON stock is down 7% this year and the company is struggling. In contrast, Costco stock is up 35%.

The company is currently being run by just two board members after the resignation of CEO Barry McCarthy.

It has struggled ever since the boom it experienced after covid.

The Costco deal is likely to help improve sales numbers. But will it improve the company’s profits?

That question is what’s driving the market reaction that we are witnessing. I believe people aren’t looking at the bigger picture. The deal means much more than just profits for PTON.

Tapping into Costco’s wealthy customer base

People who shop at Costco are exactly the type of people that will buy a $1,999 exercise bike.

By landing the deal, the company has tapped into a successful company’s customer base.

This is what the chief emerging business officer, Camp Sanders, had to say:

We’ve structured this deal with Costco to both meet our needs for profitable, sustainable growth and getting us access to Costco’s very large net incremental audience

Last month, Placer.ai’s data showed that traffic at Costco as up 31% compared to the pre-pandemic levels.

Costco is among the few retailers that has attracted more and more customers despite other retailers struggling to do the same.

As inflation erodes the public’s purchasing power, they are increasingly looking for value, and Costco provides that.

With this deal, Peloton has exposed its product to these people.

The company’s sales should get a massive boost by the time this offer expires in February.

It also hopes that this can turn into a long term partnership with Costco.

Boosting revenue post sales

While Wall Street complains about diminishing margins, it is overlooking the recurring revenue aspect of the deal.

PTON’s all access membership costs $44 per month.

It gives members access to the whole content library, something the users will need when they bring the exercise equipment home.

This high margin membership will offset any sacrifice the company is making in the short term.

If you think the price is steep, let’s not forget that PTON already targets a demographic that is financially better off.

Having access to Peloton’s equipment and library is also a form of social status people like to portray.

This is one aspect why the company chose to deal with Costco when it could have done the same deal with others seeing as it was already sacrificing its margins.

Investors should keep a close eye on the sales numbers for the next two quarters. If they’re good, the margins may take care of themselves in the medium term.