When the novel coronavirus pandemic struck the world last year, it had a booster effect on many business segments. Companies like Peloton (NASDAQ:PTON) and Zoom (NASDAQ:ZM) benefited tremendously from the global lock-down. As a result, PTON stock soared 890% from the Covid-19 lows to this year’s highs.
Sadly for the bulls, it has precipitously fallen from grace since then.
Recently, the selling accelerated and the stock fell below $100 per share. Today we evaluate the opportunity that remains in Peloton stock going forward.
From the January highs, it has already shed more than half its value. And if you listen to the experts, they are not calling to buy the dip. In fact, according to Yahoo Finance, Bank of America analyst downgraded it on May 7.
Luckily, we don’t need experts because we have all the tools we need to judge it on our own. Besides, the analyst average price target for PTON stock is $133. That’s 46% higher than Tuesday’s close.
Wall Street has a habit of not sticking their necks out until it’s too late. This time they have cause for that because of the tragic events with a Peloton product.
Earlier this year, they reported tragic injuries involving their treadmills. After receiving an official safety warning, the company recalled the product. This normally wouldn’t be a game-changing issue, but the stock was already under pressure. Therefore, the bears overwhelmed the bulls and they crashed it.
PTON Stock Has Resistance Above
Now there is tremendous technical resistance above. It won’t be easy to recover from this dip especially that it has already triggered a bearish pattern. If the bears want it, they can bring it down below $70 per share. This is not my forecast but it’s a scenario that exists. Ignoring it blindly would be a mistake. In fact, I would like to profit from it.
My favorite method to catch falling knives is to sell puts into what others fear. In this case, and instead of buying Peloton shares, I would sell the July $70 put. For this I collect a credit and I don’t even need a rally to win. The worst that could happen is to own shares at a 22% discount from current price. In that scenario, I would break even at $68 per share. Compare that with buying equities now with no room for error.
I imagine that the headlines are not going to be favorable for a while. What makes matters worse is that the company was already struggling to keep up with the demand. This is going to materially set them back in the treadmill line. They have other products and services that they can leverage but it’s a serious challenge.
Beyond Meat (NASDAQ:BYND) Meat went through something like this during the pandemic. They had to shift their focus from commercial clients to retail. There were no restaurants serving food therefore they needed to pursue the direct-to-consumer outlets. In this case, I’m confident that Peloton management will figure out a way to adapt. They still have consumer confidence for a few more months.
Strong Fundamentals Still Matter
Meanwhile, fundamentally the company is still on solid footing. It has first-mover advantages and a solid ongoing business. The opportunity going forward can still be bright. Even after the gyms reopen, new habits have already formed and they will linger beyond the pandemic spike.
Revenues exploded from $220 million in 2017 to a run rate of $3 billion now. They have already turned positive net income albeit there could be backwards steps from this crisis. PTON stock is not cheap from the traditional sense. It has an extremely high price-to-earnings ratio but that’s not a problem. The more important metric is its price-to-sales and it is only 10. This is 60% cheaper than Tesla (NASDAQ:TSLA) and almost in line with Facebook (NASDAQ:FB).
Value is not the problem that the stock is falling. The reopening thesis creates drag on it. The inoculation process is going very well in the U.S., which is bringing selling pressure to the stock. The fear is that as people go back to gyms, fewer need Peloton services.
Investors tend to overshoot. Out of the pandemic they went too far above realistic expectations. Now they are in the process of doing it the other way around. Eventually somewhere in the middle lies the truth. For PTON stock this is exactly at $95 per share. This is the 50% Fibonacci retracement for the entire pandemic rally. Yesterday the stock closed at $91, so it is natural to face resistance anyway.
Patience Is Key
Long term, I am confident that buying it here is not going to be a major disaster. Meanwhile, there is also downside due to extrinsic factors. The overall markets are on shaky grounds this week. If they fall, they will drag PTON stock with it.
This is a an aspect of investing that we often forget. Our stocks don’t trade in a vacuum, so we should respect the overall sentiment. In addition, the old Wall Street meme “sell in May and go away” is a seasonally week period.
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.
