After rising over 100% in the past few months, people may think Peloton is overvalued. Personally, I believe it is just getting started.

Around 3-4 years Lululemon (LULU) was a $50 stock, most people saw them as a clothing brand for women who liked yoga, but some investors saw more. Over the next few years, Lululemon pushed their mens line hard, and people started to realize how great the products actually are. This resulted in Lulu’s stock pushing incredible new highs.

I am starting to see the same type of pattern with Peloton (PTON). They have been known as “the bike company”, but now people are realizing they have more than just a $2,000+ bike. During a twitter debate a few months ago, a guy pointed me toward Peloton Digital, so I investigated. Peloton Digital is essentially a personal trainer on your phone for only $40 a month (cheaper than most gyms). Coaches will take you through running exercises, full body workouts, and much more.

One of the big reasons Peloton has done so well is because of their product. People who use the bike, absolutely love it. Most marketing I have to imagine is done by word of mouth. With Peloton digital, it’s the same thing. Anyone who uses the service loves it and has nothing bad to say about it. This ability to create products that are so loved by consumers has allowed Peloton to transition into other segments of personal fitness, like Peloton digital.

In a few years, I think people will look at Peloton and see the bike as one of many different products they offer. When looking at Q1 2020 revenue, over 70% of revenue came from hardware products (the bike and treadmill). So on paper, they are still the bike company, but I would keep an eye on that 70% on a Q/Q basis. I expect by mid 2021, that % of revenue that is made up by the bike will be below 50% and continue to decline.

Now this is where I really love my thesis. Let’s take a look at the growth and profitability scores of the two companies. On Lululemon’s end I think their massive growth is done for the time being, this is reflected in the growth score of 12. At the same time, we see that all the growth they have experienced has resulted in high profitability (95), which is the name of the game in my opinion. Peloton on the other hand is flipped, low profitability score, yet high growth. I believe that over the next few years Peloton will ramp up their profitability through growth. If this happens, Peloton’s scores in 2-3 years will look like Lululemon’s today.

At the end of the day my thesis is pretty simple; some people only see Peloton as the bike company, when in reality, I believe it is forever going to disrupt the gym industry and be the first official, digital and at-home gym.