Overvalued Peloton Stock Just Needs a Rebalance

It’s amazing the difference a year can make. Around this time in 2019, Peloton Interactive (NASDAQ:PTON) was in the news but for a reason that would be today considered saccharine or trivial. As I’m sure you’ll remember, the exercise bike company ran a holiday advertisement that ran afoul of social media warriors’ sensibilities. While we can laugh about it now, it became a distraction for Peloton stock.

Peloton (PTON) sign on city storefront
Source: JHVEPhoto / Shutterstock.com

On one hand, I can appreciate why eyebrows were raised. The ad in question featured a husband gifting his wife an exercise bike, which was absolutely ridiculous. Every man knows that if you want to stay married, you wouldn’t even think about being this tone deaf! But the fervor got out of hand because of course it did. That’s the consequence of our socially connected world.

Now, we’re in a radically altered environment. We can only wish that our biggest problem was a TV ad that didn’t align with our social principles. However, those that invested in Peloton stock during its PR “crisis” are at least handling this crisis with a smile on their face. A year-to-date performance of over 270% will do that to a person.

Fundamentally as well, the framework seems supportive of even more upside. With new daily coronavirus cases soaring to a seven-day moving average exceeding 200,000, we’re in for a very long winter. Naturally, the surge only incentivizes people to stay indoors, which augurs well for Peloton stock.

Another big plus for PTON? According to a YouGov survey, earlier in April when cases were exponentially rising, most respondents (53%) indicated that their exercise routine stayed about the same. Further, 17% exercised more than usual, while only 27% reported a negative impact to their fitness routine.

In other words, demand for fitness products remains robust. What did change is the outside world, which suddenly pivoted toward contactless alternatives. Here, Peloton was the right product at the right time.

Peloton Stock Compels But Wait for a Better Price

Given the twists and turns of this pandemic, I’m not about to guess how long this resurgence of cases will last. However, based on historical data provided by the Centers for Disease Control and Prevention, we’re probably going to wait at quickest a month before infections subside to somewhat manageable levels. If so, this only emboldens the bullish thesis for Peloton stock.

From a Morning Consult survey in June of this year, most respondents stated that they would be uncomfortable going to a gym or an exercise class during Covid-19. Answers ranged from very uncomfortable (46%) to somewhat uncomfortable (19%). Therefore, you’d reasonably expect fundamental optimism for Peloton stock to last into early January, if not longer.

Even if the coronavirus faded away, there’s evidence to suggest that people won’t readily utilize high-contact businesses like fitness centers. According to one research paper, the 1918 influenza outbreak imposed “long-lasting social consequences leading to a decline in social trust.”

The stage is set for Peloton stock to grab more gains. However, prospective buyers will likely be best served by waiting.

Fundamentally, PTON stock is overvalued relative to the present employment level of educated workers (bachelor’s degree and above). Between April through July of this year, the employment level of this professional demographic increased by 4.8% from 55 million to 57.7 million. During the same period, the average price of PTON jumped from $31.50 to $68.22, a 117% gain. These two metrics shared a very strong 94% correlation.

Employment Level vs. Peloton stock
Click to Enlarge
Source: Chart by Matt McCall Research Staff

But the narrative reversed from August through November, when the employment level dropped 2.9% from 58.6 million to 56.9 million. However, Peloton stock gained nearly 52% over the same timeframe.

Why is this important? Peloton’s fitness equipment isn’t cheap, so it caters toward more affluent consumers. But if this segment is suffering from economic headwinds, then PTON should theoretically reflect this downturn. It hasn’t, which means smart investors should wait for the likely discount.

Watch Economic Data Carefully

As I stated earlier, PTON stock is a great long-term investment. Admittedly, much of the enthusiasm is tied to Covid-19, which you would expect is a temporary crisis. However, the lingering impact of pandemics affords a relevancy to Peloton that you don’t find with other companies.

However, I believe PTON isn’t fully reflecting the recent turbulence we’ve seen in the labor force. When it does, Peloton stock should look much more attractive than it does right now. And at that point, you should really consider diving into this otherwise resilient name.

On the date of publication, Matthew McCall did not have (either directly or indirectly) any positions in the securities mentioned in this article.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.


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