Trading: Short Peloton, the one-trick pony

Exercise-bike maker Peloton faces stiff competition and is hugely overpriced, says Matthew Partridge.

The crisis has given many technology stocks a big boost. One of the biggest turnarounds has occurred at Peloton (Nasdaq: PTON), which makes expensive exercise bikes that come with streamed workout lessons. In late 2019 a disastrous advertising campaign had left it widely mocked, with many speculating that it was only the latest in a string of overhyped stocks. However, the pandemic and the subsequent closure of gyms has created huge demand for home-exercise equipment, propelling Peloton’s stock from $25 at the start of the year to a peak of $68.

Peloton may have done well during the crisis, with the company’s management talking about “holiday-like demand”, but its future looks more uncertain, especially with countries around the world (including the UK) starting to reopen gyms as part of a wider effort to stimulate the economy. Of course, many people may still be reluctant to visit the gym, or feel uncomfortable with the social-distancing requirements still in place. However, the rapid progression of multiple vaccine trials around the world means that there is a realistic prospect of a return to pre-crisis normality by the end of the year, which could mean that sales growth slows, or even reverses.

Stiff competition awaits

However, even if a second wave of the virus causes governments to shut things down again, or many people decide to stay home for good – prolonging the boom in home-exercise equipment – there’s still no guarantee that Peloton will be the big winner from all of this. It not only faces stiff competition from companies selling similar products – Hydrow, for instance – but also from makers of exercise apps, such as Apple and Zwift. Exercise apps, which allow people to stream classes over laptops and tablets, or take part in virtual races, have several advantages over Peloton. They facilitate a wider range of activities than just cycling. More importantly, apps allow users to use existing equipment instead of spending $2,000 on a new exercise bike (something that they may be loath to do in a recession).

“Peloton’s exercise bike costs $2,000, a large outlay in a recession”

Even if Peloton does become the dominant force in home exercise, it still looks aggressively priced, trading at 5.3 times projected 2021 sales. And note that despite a 66% year-on-year surge in sales in the first quarter, Peloton still hasn’t found a way to make the company profitable. It is expected to lose $131m this year and $96m in 2021. This is partly because the profits on the machines are offset by the huge amount that Peloton is spending on marketing in an attempt to win new customers.

Peloton’s shares currently trade at $60, around 16% down from their peak at $68 earlier this month, suggesting that the market seems to be starting to cool on the company. I recommend that you short Pelton at its current price, to the tune of £33 per $1. If you cover your short at $90, this would give you a potential downside of £990.

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