Peloton Sales Rise 232% – Is It Now A Buy?
Back in September, I showed you 1 Reason To Avoid Peloton Stock to protect your retirement portfolio.
Today, I answer Peloton Sales Rise 232% – Is It Now A Buy? You can read the full article above.
But if you don’t want to; here’s a quick recap of the last article on Peloton.
1 Reason To Avoid Peloton
1 Reason To Avoid Peloton
It’s Enormously Overvalued
Normally in these articles I talk about profitability, cash flow, the affects coronavirus is having on a company’s financials among other things.
But frankly none of those matter with Peloton (PTON) due to its huge valuation.
Peloton operates an interactive fitness platform where people can exercise with the help of real professional trainers virtually, from their home.
Due to the coronavirus and people locked at home, its seen a massive increase in sales, profitability, and share price this year.
Its revenue in the last 12 months is up to $1.8 billion from $218 million in 2017 when it IPO’d.
It just became profitable for the first time in a quarter on September 10th, 2020 when it released its most up to date quarterly financial info.
And its stock rose 181% from $29.74 per share on January 2nd, 2020 to $83.562 per share as of this writing.
This is all great for Peloton and its shareholders… But it also leads to a huge problem.
It’s massively overvalued.
Its current P/E is unreadable because Peloton’s never earned a full year net profit as a public company.
A P/E reading requires 1 year’s profit to measure not just one quarter like Peloton has.
Its current P/CF is 48.1.
And its current forward P/E is 416.7.
I look to buy companies with valuations below 20 on all these metrics to consider the company undervalued or at worst fairly valued…
Peloton crushes this threshold.
Why below 20?
Because that means the company is at worst fairly valued… And if its significantly under 20 that means the company is undervalued.
When a stock is fairly valued or undervalued it gives you more margin of safety in investing terms.
This also means you have a much higher probability of earning higher returns owning its stock over time. These combined make the stock a less risky investment.
With Peloton stock being so overvalued it means there is no margin of safety… That you have a far lower likelihood of making money owning its stock over time. And these make the stock riskier.
But why is it so overvalued?
Because it’s helping to revolutionize how we exercise.
People expect Peloton to continue transforming how we work out.
Because of this people are buying its shares a lot on the hopes of this. And this is taking its share price far above where it should be based on its current profits.
Peloton will continue helping people all over the world exercise even after this pandemic is over. And as a leader in this space it should benefit over time.
But exercise trends change rapidly, and I require as much of a margin of safety and room for error as possible when investing in stocks because bad stuff always happens at some point.
If you’re buying Peloton stock today there’s zero room for error due to its huge valuation.
For this reason of its huge valuation I recommend you stay far away from investing in Peloton stock.
This thesis to avoid investing in Peloton DID NOT continue to play out after it released its most up to date quarterly earnings on November 5th 2020… Sort of.
Sales rose a massive 232% in the year-to-year quarterly period to $757.9 million.
It now has more than 1.33 million connected monthly subscribers… Which is up 137% from the year prior.
And its net income rose to positive $69.3 million compared to a net loss in the same period last year.
This led shares to continue their massive upward trend since the beginning of the year and sent shares to 276.7% so far this year as of this writing.
This is all fantastic news for Peloton and its shareholders…
But it doesn’t solve the #1 issue I told you about back in September… The only reason I told you to avoid it a few months ago…
Its still enormously overvalued.
As of this writing its P/E is 95.8.
Its P/CF is 43.5.
And its forward P/E is 277.8.
This continued massive overvaluation makes owning its stock riskier… And means you should expect to earn lower returns owning its stock going forward.
And for these reasons I still recommend you avoid its stock.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above