When we mention a stock that is down 18% in a couple of months, it’s usually a sad situation. In this case Peloton (NYSE:PTON) is down on its luck of late but still a happy story. Year-to-date Peloton stock is up 316%. It fell hard during the October market-wide correction, the way back is the opportunity going forward. Own it for the long term and it should be a winner.
I am not a super-fan that always touts the upside. Back in February I suggested to wait for the pullback before buying. That’s what happened as the stock crashed before basing back then. The rally that followed was monstrous thanks to the tailwind from the quarantine. The point is that I come to this with a just opinion, not one pushing only one side.
Even though the indices made new highs since October, Peloton still lags behind. It’s not easy to maintain the momentum that it had earlier in the year 100% of the time. Nevertheless, rallying 25% after the earnings debacle was impressive.
Now the stock is coming into a fork but not from the fundamental perspective. The fundamentals are still as sound as ever. The chart, however, suggests that Peloton stock should face resistance going into $120 per share.
So far the bulls have rallied well off support and have filled the Pfizer (NYSE:PFE) gap. Yep, when vaccine companies deliver great news on that front, investors sell PTON stock in return.
Corrections are not reasons to ditch the stock. Quite the contrary. Stocks need to have dips to build sustainable strength. The resistance will be from those who were stuck from the recent correction. They may exit their positions since they are about even again. That’s normal price action and is not a reason to panic sell.
Before making any decisions with regards to the stock, investors need to decide on their appropriate time frames. Those who are in it for the long haul shouldn’t fret every red tick. More active traders are the ones looking for optimal entries.
In this case, it makes sense to buy the dip into $105, or buy the breakout from the resistance above. Either way would make a great start for a long stint. Over the years it probably won’t matter much, but most of us prefer starting off green, if possible.
Peloton Stock Is on Solid Ground
As for the fundamentals, they are beyond reproach even this early in its life. The concept of working out at home while staying in touch with a community is bankable. Quarantine proved as much as Peloton has not been able to keep up with demand.
The fact that the income comes from subscriptions makes for an excellent base. The company then can leverage this to expand its offerings. So far, the high cost of the equipment has not been a problem. That leaves room for adjustments going forward as competition grows. Until then they have the first mover advantage.
There are many competitors but they each have a different flavor. Just this week we learned that Apple (NASDAQ:AAPL) is launching Apple Fitness+. Lululemon (NASDAQ:LULU) purchased The Mirror, which is a concern because they have a formidable marketing team. They have the client base to really experience explosive growth with their in-home workout offering. It is a serious threat, but the segment is new enough that there should be enough room for most of them to prosper.
Now to the nitty-gritty of what makes Peloton stock work for me here. This year investors have not cared much about traditional metrics of value. Even if they did, this stock is still reasonable. It has a price-to-earnings ratio close to three digits but a price-to-sales of only 14x.
I say “only” 14 times because it’s 10 times cheaper than high-flying stocks like Zoom (NASDAQ:ZM) or Snowflake (NYSE:SNOW). While a 98x P/E is high, asking for profitability is wrong this early in the process. This is like an Amazon (NASDAQ:AMZN) situation where growth doesn’t come cheap.
The Proof Is in the Pudding
They have to spend a lot to sustain an exponential ramp of sales growth. It is not a reason to short it. Peloton more than tripled revenues in six quarters. That is an amazing feat and to knock them down for results like this is insane.
Critics also complain about the Peloton backlog. Having too many sales is a happy problem. Few companies fail while having too much business to handle. Eventually they will figure it out, and that will elevate the stock another notch when it happens.
Experts on Wall Street are rarely right in advance. They usually are one step behind with their recommendations. The Peloton chart tells of no imminent reason to worry.
Look left on the above chart and you will find support zones below. A market-wide correction could knock it down a bit, but that’s the case for all stocks. This currently is a source of worry since we are setting records on bad fundamentals. Investors should not load up with full positions thereby leaving room to add on downturns.
The options markets offer great alternatives for those who want to venture out. For example, I can sell the Peloton January $100 put and collect almost $4 per contract for it. This trade with pay maximum profits even if the stock falls more 14% by mid January.
I won’t lose money until Peloton stock falls below $96 per share. That’s a nice cushion to have during these uncertain times. They will need it early next year when they roll over the pandemic comp sales stats.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
