Peloton’s ‘Stupid’ Valuation Doesn’t Hold Up

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Has Peloton’s (NASDAQ:PTON) valuation actually “peddled to stupidity?” That’s the argument that noted short seller Andrew Left of Citron Research made in a tweet about Peloton stock.

Peloton Stock: PTON's 'Stupid' Valuation Doesn't Hold Up
Source: Sundry Photography / Shutterstock.com

His argument? Teladoc (NASDAQ:TDOC) – a telehealth company benefiting from similar stay-at-home tailwinds – has added $8 billion in market cap this year, or about $1,300 per new subscriber. Peloton, meanwhile, has added $5 billion in market cap, or about $17,000 per new subscriber.

“This is retail mania you can love the product but stock has peddled its way to stupidity,” tweeted Left.

I couldn’t agree more. Yes, Peloton is benefiting in a huge way from stay-at-home tailwinds. Yes, this is more than a near-term bump. Coming out of the novel coronavirus pandemic, there will certainly be a permanent acceleration in the at-home fitness trend.

But, at current levels, PTON stock is already priced for all of that, and then some. Chasing this rally seems to be a play on the “fear of missing out,” or FOMO, dynamic persisting forever.

Spoiler alert: it won’t. Soon, the Covid-19 FOMO trade will unwind. When it does, so will the hyperbolic valuation underlying Peloton stock.

Still a Niche Product

Despite all the hype and fanfare, Peloton still projects as a niche at-home fitness product at scale.

On the Covid-19 front, consumers aren’t going to stay away from the gym forever. Most surveys today suggest that while consumers remain hesitant to back to the gym today, that hesitancy will fade within the next few months, or once we get a vaccine. For example, this Morning Consult survey found that 70% of fitness enthusiasts miss going to the gym, while this TruePublic survey found that once a vaccine is ready, most consumers will feel comfortable going back to the gym.

Big picture: most consumers will get back into the gym by 2021.

When they do, the Peloton value prop will return to what it was before Covid-19. In short, that’s an extremely expensive, very bulky, exceptionally limited, and somewhat snobby at-home fitness product designed for a very niche fitness audience that can both afford the product and service, and sees the value in having a $2,000-plus fitness bike.

Before Covid-19, that market was tiny. After Covid-19, it will be slightly bigger, but still small.

Peloton Stock is Perfectly Valued

The problem with Peloton stock is that FOMO dynamics have pushed this stock up into significantly overvalued territory.

Specifically, Wall Street has piled into the long PTON trade out of fear that the coronavirus pandemic will last forever, consumers will never go back to the gym, and Peloton bikes will be in every home in the U.S.

None of that will happen. The coronavirus pandemic will fade over the next few quarters. A vaccine in 2021 will bring back normal consumer behavior. Gyms will re-open. Studio classes will resume. Adult sports leagues will restart. And this whole idea that Peloton is going to disrupt the traditional fitness industry will disappear.

Peloton’s growth narrative will start to flat-line in 2021. Revenues growth will slow. Subscriber growth will slow. Margin expansion will slow. Profit ramp will slow.

As all that happens, the elevated valuation supporting Peloton stock up near $50 will crumble.

After all, the highest earnings per share estimate on Wall Street for 2026 is $3. The market’s five-year-average forward earnings multiple is 17. Based on that combination, a reasonable 2025 price target for Peloton stock is $51 – essentially implying zero upside over the next five years.

Bottom Line on PTON Stock

I get why everyone is so excited about Peloton right now. In a world where gyms are closed, Peloton is one of the best workout options out there (although a still niche option, given its high price point, huge footprint, and niche use directed exclusively at cardio).

But we won’t live in this world of gyms being closed forever. Instead, the world will get back to normal soon. Sure, that normal will be a “new” normal. But that new normal doesn’t involve gyms being closed. It just means more hand sanitizer and more regular cleaning at gyms.

Global economic normalization in the coming quarters will ultimately short-circuit the current red-hot PTON stock rally. As such, I wouldn’t chase this rally. I’d fade it.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm.  As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/pelotons-stupid-valuation-doesnt-hold-up/.

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