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The Ratings Game: Peloton stock rockets to biggest gain on record amid reported deal interest, but not all analysts are sold

Shares of Peloton Interactive Inc. surged Monday following reports indicating that Amazon.com Inc. and others have shown interest in acquiring the maker of connected exercise equipment, which has seen its stock crunched in recent months amid a slowing of demand.

Amazon AMZN, +0.19% hypothetically could drive various links with Peloton PTON, +20.93%, including making its classes part of the Amazon Prime subscription offering, according to The Wall Street Journal, which reported on the deal interest late Friday, citing unnamed sources. While the report noted that both Peloton and Amazon were working with their advisors to consider a potential combination, it also mentioned that “no deal is imminent.”

The Financial Times separately reported that both Amazon and Nike Inc. NKE, -0.17% were considering possible bids for Peloton but that neither one has held talks with the company.

Representatives from Peloton and Nike didn’t immediately respond to MarketWatch’s request for comment about deal consideration. A representative from Amazon said that the company doesn’t comment on rumors or speculation.

Peloton has seen demand for its equipment fall off recently after an initial surge earlier in the pandemic, and its stock has been hit hard in the process. As of Friday’s close, the shares were down more than 85% from their 52-week intraday day.

The reported deal interest offered a bit of optimism. Shares gained more than 20% in Monday trading to notch their largest single-day percentage gain on record as various analysts chimed in with views suggesting that a combination might make sense.

“Arguably, fitness can be viewed as the next consumer experience to be digitized, after books, music, video and video games,” wrote MKM Partners analyst Rohit Kulkarni, who noted that Peloton and Amazon already have a “working relationship” since Peloton has appeared at Amazon Web Services summits.

He rates the stock at neutral with a $30 fair-value estimate.

Truist Securities analyst Youssef Squali saw “clear and material synergies with Prime.” Peloton has more than 2.7 million existing connected-fitness subscribers but could grow its reach as part of Amazon, helping to “amortize the cost of content,” he reasoned.

Amazon could also come to view Peloton’s content as a “competitive differentiator” after it recently announced plans to raise the price of an Amazon Prime membership, Squali wrote. He has a hold rating and $68 price target on Peloton’s stock.

But at least one other analyst was skeptical that a Big Tech deal for Peloton would bring much value to a potential buyer.

“Although Peloton’s star was propelled during COVID, it’s become increasingly clear it’s a much smaller (still impressive) business than prior perception,” wrote BMO Capital Markets analyst Simeon Siegel. “As such, one has to ask whether the brand is simply too small to make a difference to the world’s largest companies.”

In regards to a possible Amazon tie-up in particular, Siegel noted that Peloton has been “attempting to re-elevate its business, raising price following profit-eroding discounts.” However, bundling its connected-fitness offering with Amazon Prime would seem to go against that strategy.

“We believe PTON should ‘sell less and charge more,’ not cut prices further,” Siegel wrote.

He further hypothesized that neither Peloton nor the bidders appear to benefit from the recent reports, raising questions about who provided information about the deal interest and why they did so.

“Before opining on transaction-likelihoods, the timing (Friday, post-market, ahead of EPS) questions motivations behind the sources,” Siegel wrote.

He rates Peloton’s stock at underperform with a $24 price target.

Peloton is due to report fiscal second-quarter results after the closing bell Tuesday. The company released preliminary results in January.

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