Wall Street’s Buy Recommendations for Peloton and Roblox: A Closer Look

Recent Optimism in Challenging Markets

Despite their struggles, a maker of exercise bikes and a video game company that faced severe criticism from short-sellers have caught the attention of Wall Street, as fresh Buy recommendations are issued by analysts. Bank of America Securities has set a target price of $9 for Peloton Interactive, representing approximately 20% upside, while Morgan Stanley predicts that Roblox could soar to $65, reflecting a potential increase of about 30%.

Peloton’s Battle with Declining Subscriptions

Peloton’s journey has been rocky, primarily due to a declining customer base willing to pay for its subscription service. After peaking in the fiscal year ending June 2023, subscriptions slipped by nearly 1% last year and are projected to decline by 5.1% this year. The company has also faced significant cash burn. However, with the upcoming appointment of new CEO Peter Stern, who has experience at both Ford Motor Company and Apple, hopes for a turnaround are on the horizon. Notably, Stern co-founded Apple Fitness Plus, which may bring valuable insights to Peloton’s strategy.

Cost-Cutting Measures and Financial Outlook

To address its financial woes, Peloton has embarked on a cost-cutting initiative. Analysts believe that the company could achieve a remarkable turnaround, predicting it will swing to a positive $110 million in free cash flow this fiscal year. Analyst Curtis Nagle from Bank of America has raised his rating from Underperform straight to Buy, citing ample room for further cost-cutting measures, including potential headcount reductions. Currently, subscription revenue per employee significantly lags behind its peers. Furthermore, Peloton’s shift away from manufacturing is anticipated to bolster free cash flow, enabling the company to reduce debt and interest payments.

Exploration of Growth Opportunities

Despite its challenges, Peloton has opportunities for growth. Notably, only a third of its subscribers are male, a demographic segment that is slowly increasing. Additionally, the market for treadmills, an area where Peloton has limited presence, is twice the size of its current bike market. Recently, Peloton expanded its distribution channel by partnering with Costco Wholesale for the holidays, a strategic move to increase visibility and sales.

Roblox: Riding High Despite Controversy

Roblox is also experiencing a turbulent time but has managed to rise slightly, up 20% since just before short-seller Hindenburg Research released a report claiming the company inflated key metrics while labeling the platform as a “hellscape for pedophiles.” Although Roblox is primarily recognized as a gaming platform, it describes itself as a “human co-experience platform,” highly favored by children who navigate various user-generated worlds. The company is expected to generate $4.3 billion in revenue this year, marking a 24% increase.

Hindenburg’s Critique and Roblox’s Response

Hindenburg’s findings raise valid concerns, particularly regarding user accounts that could be inflated by players creating multiple identities to farm goods or escape bans. While Roblox acknowledges these issues in its annual report, the company maintains that it implements robust safety measures to protect its user community. The question of profitability also lingers; however, Roblox’s free cash flow is expected to reach around $600 million this year, with projections of $1.5 billion in three years.

Positive Analyst Ratings amid Skepticism

Morgan Stanley’s Matthew Cost upgraded Roblox from Equal Weight to Overweight despite the controversy surrounding the company. Cost believes Roblox has hit an “inflection point,” with share gains accelerating as it reaches broader audiences on various platforms, including PlayStation. A significant portion of its user base is aging up with over-17 players, demonstrating the platform’s ability to evolve and attract diverse demographics.

The AI Demand Landscape: Super Micro Computer and Dell

In a broader context, Super Micro Computer, another target for Hindenburg Research, has seen its stock drop over 40% amid concerns regarding a reporting delay and auditor resignation. The company specializes in AI systems but faces stiff competition in the low-margin segment of hardware that supports high-margin chips from Nvidia. Analysts suggest that Dell Technologies may gain ground in this sector, with the stock having increased 13% since discussions around Super Micro’s challenges.

Conclusion: A Mixed Outlook

While BofA’s recommendation for Peloton and Morgan Stanley’s upgrade for Roblox signify a sprinkling of optimism amid tough market conditions, each company faces unique challenges that investors should carefully consider. Peloton’s need for subscribers and effective cost management contrast sharply with Roblox’s struggles to maintain user safety and profitability. As these companies navigate their respective landscapes, stakeholders will be keenly observing their performance and adaptive strategies.