Peloton- What High Expectations Get You
Originally written 1/2/2022
Peloton has to be one of the craziest stocks in the market this past year. This company went from a 400%+ gain in 2020 to a -75% loss this past fiscal year. And, as being a shareholder since March 2020, it’s been a crazy ride to be a part of.
Peloton has had a lot of attention drawn to it this past year. Not just because it’s one of the defacto “stay at home” stocks, but also because Peloton has seen its fair share of controversy this past year. Here is a brief list:
In May, an incident involving a Peloton left a child dead1.
Series of recalls2 following safety concerns.
Peloton slashed the prices of its bikes midway through 20213, possibly indicating weak demand.
User data breach and hack 4.
A scene in the first “Sex and the City” spinoff series depicted a character dying of a heart attack post Peloton workout5
I honestly have no idea how the last controversy sent shares lower, like, that’s not even real!
While Peloton has seen its share of controversy this past year, I think the bigger story to look at is the issue of high expectations and subsequent disappointment.
Peloton’s Expectations
As mentioned earlier, 2020 was an amazing year for Peloton.
About 400% stock return in 2020.
Revenue growth of 172% and 232% in Q3 and Q4 of 2020 respectively6.
Peloton turned its first profit in 3 of the 2020 quarters7.
Additionally, Peloton was seen as one of the core “stay-at-home stocks” along with Zoom and Teladoc.
So looking at Peloton, expectations were High. Not to mention valuations of this company were equally as high. At the start of 2021, Peloton was trading at its highest P/S ratio during all of 2021, as well as a ~100 PE ratio at 12/31/20208.
So what do high expectations get you?
Nothing.
Here’s the deal with high expectations, if you don’t meet them, you're going to be disappointed. And disappointment leads to selling.
If you are a company that has everything to prove, the moment you disappoint, you will be severely punished. Our natural loss aversion9 makes this hurt even more.
So what do high valuations get you?
Potentially no returns for a considerable amount of time.
At least that’s the case for Peloton.
So here’s what I did. I took the Z-Score of Peloton’s P/S over 2021, and overlayed it with Peloton’s daily close. I decided to use the P/S valuation multiple as Peloton has not been consistently profitable. As we all should know, the higher the P/S, the more willing investors are to pay up for the stock.
What’s interesting to me is that this graph shows if you bought Peloton shares when its P/S was well above the average (think 2+), you saw negative returns.
Add in 2020 numbers for comparison, and it’s evident that buying at the highest P/S valuations equated to negative returns.
Now it’s important to note that this is an evaluation of the short term. You can make money in the stock market by buying at high valuations and holding for a long period of time (See here10 for a look at the S&P 500). Even buying the S&P at record valuations in the dot com bubble paid off today. However, it took 10+ years to dig yourself out of that hole.
And that’s the real point I’m trying to make. The price you pay is everything. The higher the valuation you buy, the more likely you are not going to make a considerable return. Sure, you could have bought Peloton at P/S of 11 and turned a profit a couple of months later when the P/S peaked at 15, but is that really realistic for you? Is your ability to predict the future price movement really that great?
It’s not for me.
So what do I do?
I look for companies on the opposite side of the spectrum. I look for a good company, trading at lower valuations, where if they do anything remotely positive the market is going to react in my favor. And if this company has a few missteps along the way, it’s no big deal, the market has already factored that in, hence why it’s trading at a low valuation. Like Mary Jane says in the latest Spiderman movie, “If You Expect Disappointment, Then You Can Never Really Get Disappointed”.
While I don’t want disappointment, I would rather not want to own a company that has to tread lightly on the frozen lake that is high market expectations.
Peloton is now trading at historically lower valuations, but are they still a good company? I’ll let you decide.
-A Little Cardinal
https://www.nytimes.com/2021/03/18/business/peloton-tread-death.html
https://www.verdict.co.uk/peloton-shares-slump/
https://www.verdict.co.uk/peloton-shares-slump/
https://www.palmbeachpost.com/story/lifestyle/2021/06/27/how-peloton-keeps-generating-negative-headlines/7756316002/
https://www.businessinsider.com/peloton-ad-responds-to-and-just-like-that-controversy-2021-12
https://www.macrotrends.net/stocks/charts/PTON/peloton-interactive/revenue
https://www.macrotrends.net/stocks/charts/PTON/peloton-interactive/income-statement?freq=Q
https://www.macrotrends.net/stocks/charts/PTON/peloton-interactive/pe-ratio
https://viridianadvisors.com/why-losses-hurt-more-than-gains-feel-good-part-1-when-1-doesnt-equal-1/#:~:text=Disproportional%20Impact,we%20feel%20about%20potential%20gains.
https://www.marketwatch.com/story/the-sp-500-is-now-more-overvalued-than-ever-per-this-measure-2020-01-08