Peloton (NASDAQ:PTON) stock is still new on Wall Street and it is already making some waves. Unfortunately, not all of those waves are good. Yes, the high-tech bikes were all the rage last year but there was also ire over the company’s advertising. Some took issue with a particular commercial, and negative coverage swirled. I will leave Peloton’s advertising to personal preference, but I liked the stock on the dips last year.
However at these levels, there is not an obvious point of entry. Peloton stock near $33 per share carries a lot of short-term risk.
Before you label me a hater, I am not bearish on the stock. I merely am trying to define proper entry points. These are different from one investor to another. Peloton just finished a 34% rally, and it is going into a prior failure point. Normally these zones offer resistance, so the odds of a stall are high. The stock needs time to digest the new levels. When a stock consolidates it offers investors the opportunity to book profits so that the base gets stronger. Then the bulls can clear the resistance and use it as forward support. From there, the rally can take a second leg higher.
So the difference is time. Some want to hold Peloton stock for years, while others want to swing trade it for shorter-term profit, and I am not talking about day trading. So it’s the old buy low, sell high argument, versus the buy high, sell higher concept.
Peloton Stock Is Worth the Risk
Fundamentally, the idea behind Peloton stock is great. It is based on a subscription revenue model that the company can use to feed expansion plans and grow income. And it is flexible enough to switch between hardware and app sales to adapt to changing demands. It does face a lot of competition from traditional gyms. Also, similar alternatives have recently emerged and I am seeing some slick ads that could give Peloton equipment some competition. Only time will tell, but it is my gut instinct to say that there will be enough room for all competitors to profit.
For now, it is hard to argue for tangible value in Peloton stock. It sells for over 8 times its sales which is expensive. But this is a growth story, so it is okay for it to carry a premium here. The real value of owning the shares is their future worth. The assumption that investors make when buying expensive new stocks like this is that in the future they will grow into a reasonable valuation.
Looking for a Fit Trade?
Even from a trading perspective Peloton stock is relatively high. It would make for a better entry after a dip perhaps near $31 per share. It has been setting higher lows since November so it can afford to fall. Dips below $30 are buying opportunities.
My point today is not to find the absolute perfect entry point. This is never a realistic goal. But in this case and with earnings coming out soon, there is a lot of immediate binary risk that could cause a short-term problem. No one wants to buy into a stock and immediately see red. So even if the long-term objective is to own it for years, it is best to take partial positions now if at all and then manage them after earnings. These events are always a coin flip in the short term. We don’t know how the investors will react to the reports regardless of their quality.
Case in point, Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB) recently delivered similar earnings report with exact opposite reactions on Wall Street. There is a lot of gambling around the earnings events of any stock. Caution is warranted going into Peloton’s report later today.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
