Better Stock to Buy Now: Lululemon or Peloton?

Lululemon Athletica (NASDAQ:LULU) is one of Canada’s most popular consumer brands.

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Lululemon (NASDAQ:LULU) and Peloton Interactive (NASDAQ:PTON) are two of the most popular consumer brands in athleisure and exercise equipment, respectively. One is a popular store that can be found in cities across North America, and the other is a vendor of exercise equipment with attached tablets. Both companies have loyal customers as well as detractors. The question for investors is, which is the better buy?

The case for Lululemon

The case for buying Lululemon over Peloton rests on the fact that it is easily the more profitable and faster growing of the two companies. In the trailing 12-month period, LULU delivered the following:

  • 18.6% revenue growth
  • 82% diluted earnings per share (EPS) growth
  • 68% free cash flow growth
  • A 58% gross margin
  • A 16% net margin
  • A 42% return on equity (ROE)

Here are comparable figures for PTON in the trailing 12-month period:

  • -4.85% revenue growth
  • -8% free cash flow growth
  • A 40% gross margin
  • A -28% net margin
  • A non-meaningful return on equity
  • The rest of the figures I provided for LULU were non-meaningful for PTON in the TTM period due to them having been negative in the base period

The basic problem with Peloton, like many other companies, is that it was a “COVID-19 winner” in the early months of the pandemic. When gyms shut down, many people flocked to exercise equipment companies to get their much-needed gym supplies. Eventually, the COVID-19 restrictions, including gym shutdowns, ended. The result of that was that people no longer needed Peloton exercise bikes as much as they used to.

Also, established players like NordicTrack quickly copied Peloton’s gimmick of including a tablet with the bike. The result of the pandemic safety measures winding down and competitors catching up was Peloton’s sales declining.

The case for Peloton

Peloton is not doing well as a company by any stretch of the imagination. However, it does arguably have one factor going for it: valuation.

Lululemon is pretty pricey. At today’s prices, it trades at the following:

  • 27 times earnings
  • 4.65 times sales
  • 10.5 times book value
  • 19.35 times operating cash flow
  • 26.9 times free cash flow

It’s not cheap. By contrast, PTON trades at 0.5 times sales, which is extremely cheap. However, there are no price/earnings, price/book or price/free cash flow ratios for PTON, because that company is deeply unprofitable. So, comparing it to Lululemon is an “apples-to-oranges” comparison.

Final verdict: LULU stock by a mile

Taking everything into account, Lululemon appears to be a better buy than Peloton. It’s growing faster, it has higher margins, its brand is more differentiated, and the list just goes on and on. True, Peloton does have a lower price/sales ratio than Lulu does, but the persistent lack of profitability raises the question of whether PTON is simply structurally incapable of being profitable. Maybe it just faces too much competition from stronger players. If that’s the case, then the low price/sales ratio means nothing because said sales will never translate to profit. Therefore, Lululemon looks like a better buy than Peloton today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Lululemon Athletica. The Motley Fool has a disclosure policy.

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