Peloton (PTON): Fear or Cheer?

Since its January peak at just over $167, it’s down nearly 50% to roughly $86 as of this writing. Below you can see that Peloton saw buying in the shares in late 2020 and January.

Recently, it’s fallen far:

Source: www.mapsignals.com, End of day data sourced from Tiingo.com

Recent news broke that Peloton is recalling its Tread and Tread+ treadmills. This is due to 70+ safety incidents and a child’s tragic death.

Investors who bought into the growth story might be wondering if it was a colossal mistake.

To answer that, let’s first let’s revisit why Peloton looked like a great setup in the first place:

Peloton boasts:

• 1-year sales growth of 100%
• 3-year sales growth of 103%
• 1-year earnings growth of 62%
• Gross profit margin of 45%

It’s also owned by the big boys and girls with 78% institutional ownership. Peloton was also collecting lots of Big Money buy signals according to MAPsignals data: logging 12 Big Money buys since July 1^st, 2014.

That just means that the shares were increasing in price as volumes increased.

Things looked great for Peloton to continue its massive bull run. But suddenly in mid-February, growth stocks met headwinds. Since then, high-growth stocks fell from grace in favor of value and dividend stocks.

PTON was already falling 30-40% when tragedy struck for some pets and children and their new product is now in recall for repair or refund. They’ve sold roughly 125,000 tread units as high as $4200 each. The company said this will impact Q4 sales by -$165 million.

This is definitely not great for the short-term at least. It’s got a lot of investors spooked and running for the hills.

The question remains though: Is it time to grab it or bag it?

Let’s first look at their most recent earnings report.

Peloton just reported a 3-cent EPS loss, beating the 12-cent loss expectations for their fiscal third quarter. They posted $1.26 billion in sales, beating estimates of $1.1 billion. Revenue grew a shocking 141% from a year ago.

PTON showed $239.4 million in subscription revenue, up 144%. This is a key point. The company looks like it sells exercise equipment, but they sell content. Their classes and content costs are a subscription fee paid monthly.

In a shareholder letter, Peloton explained they have over 4.4 million members (as of December 31, 2020). Total members grew 22.2% since the prior quarter, up from 3.6 million. At $39 a month, that’s $2 billion a year. And it’s growing.

Even with the recall impact, Peloton is still guiding $915 million in revenue for Q4, 2021.

First, the exodus from growth stocks dragged down the stock. Then terrible headlines hit further amplifying the stock’s pullback.

This reminds me of a current titan that was once a volatile young growth story: Tesla, Inc. (TSLA).

In 2013 news broke of a battery fire in the Model S after a driver ran over a large metal object. On October 3^rd, 2013 a Reuters article read:

• Two days after a video of a burning Tesla electric car went viral, the “green car” maker grappled with ways to contain the damage as investors shaved $2.4 billion off the company’s market value.
• Tesla shares fell 4.2 percent to close at $173.31 on the Nasdaq. That came on top of a 6.2 percent drop on Wednesday.

I remember the media said Tesla stock was done. The story was ruined, and no one would buy their cars. The stock got smoked. Remember: it was trading at $173.

Now look at this chart:

Source: www.mapsignals.com, End of day data sourced from Tiingo.com

The battery and subsequent engine fires from crashes, look tiny in the rearview mirror now. TSLA peaked at around $883 in January and then pulled back to $635 as of this writing. From the bad 2013 headlines the stock is up 267% after peaking up 410%.

Very few companies change the game like Tesla did for cars, or Peloton for exercise.

Remember, there tends to be gloomy headlines from time to time for nearly all stocks. Years later, investors will likely forget them. When you have a great growth story on your hands, it doesn’t always mean a smooth ride.

In the case of Peloton, it’s hit a snag. But times like these could represent potential opportunity for the long-term investor. Only time will tell.

Disclosure: the author holds a long position in TSLA in personal accounts at the time of publication, but no position in PTON.

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