Is Now The Time To Be Brave With Peloton (NASDAQ: PTON)?

A 10% move higher during Wednesday’s session meant shares of the interactive exercise bike company Peloton (NASDAQ: PTON) were among the best performing of US equities. The jump comes after a torrid couple of weeks for the New York-headquartered company, who’ve had to watch their shares fall more than 50% since their earnings last month. It means the once high-flying pandemic powerhouse is now trading more than 70% lower than their all-time highs, set at the start of this year. 

The current move lower is fairly understandable when the numbers are considered. Not only was the company’s EPS for last month’s fiscal Q1 earnings report deeper in the red than expected, but their revenue for the quarter was also up barely 6% year on year. Wall Street can often look past a red EPS if the revenue growth is steep enough, but a deeper than expected loss with stagnating growth can be a death sentence in today’s macro environment of rising interest rates. 

Investors Walk Away

While Peloton was able to post a decent retention rate of 92%, it wasn’t enough to impress investors enough to stick around. Indeed, management went so far as to lower their forward guidance on many key metrics which served to only confirm that last year’s performance might very much have been a once-off that won’t be repeated. In their letter to shareholders, management still struck a bullish tone and said "we remain convinced that the growth opportunity for Peloton is substantial and this informs our decision to prioritize accessibility and household acquisition over near-term profitability, particularly as our industry-leading net promoter scores and retention rates support a very strong consumer LTV (lifetime value) and unit economics."

But the market clearly wasn’t buying it, and it’s been a brutal few weeks for Peloton shares. Still, in the short term at least it looks like they might have put in a low. They’ve bounced off $41 several times in the past three weeks and with the bears unable to take shares lower, the momentum has swung to the few remaining bulls to see if they can stage a fightback. The folks over at Deutsche Bank certainly think it’s possible anyway, as they came out with a fresh Buy rating on Peloton stock late last week. Analyst Chris Woronka and his team believe that there are scenarios where it can get worse before it gets better for Peloton, but see “many more scenarios which result in a rally based on fundamental and unemotional analysis of the company's earnings power in a normalized fully-reopened economic environment."

Their $76 price target suggests there’s upside of almost 70% to be had from where shares closed on Wednesday, including the solid pop they had during that session. This is almost too good to sit out on, especially as investors have a solid line of support to work an entry around, and a stop loss exit below. In addition, there are several technical factors starting to align that support a long position. The stock’s RSI has moved up from the lows 20 to the mid-30s, showing strong momentum on the bid, while the MACD had its first bullish crossover in two months last week. 

Getting Involved

While last month’s numbers caught almost everyone by surprise, this is still the same Peloton that Credit Suisse and Cowen were giving an Outperform rating to in the days before November’s release. They felt that fundamental improvements to Peloton’s capacity and supply chain capabilities would support decent demand this holiday season, while "incremental demand from the Bike price cut (3rd party data shows strong reception) was unlikely to show this quarter as sales are booked on delivery. An early read into how Tread sales are faring may reshape full-year expectations."

Without a doubt, the actual earnings print left a lot to be desired, and confirmed that the Peloton which investors and Wall Street became familiar with last year has vanished perhaps indefinitely. The recent rise in the Omicron variant of Covid-19 did little to improve the share price, when last year it would likely have provided a solid bid. Peloton can no longer be considered a pandemic play, but perhaps it can be a 21st century fitness play. At the very least, those of us getting involved at these levels can expect more upside than downside in the near term.