Is Peloton’s (NASDAQ: PTON) Selling Overdone?

With a 50% slide in their shares over the last four months, Peloton (NASDAQ: PTON) risks becoming one of the biggest, and latest, stars of 2020 to blow up. Like for many tech and e-commerce names, after an initial wave of risk-off selling in March of 2020, the COVID pandemic became a cloud with a very silver lining. With gyms shut and stay-at-home orders issued, more people than ever before had to turn to home workouts. 

Unsurprisingly, the old-fashioned exercise bike was high on people’s lists and with Peloton’s state-of-the-art bike having just started to make a name for itself, the stars aligned for the Kickstarter founded and New York-headquartered company. Shares had traded largely sideways since their IPO six months before the pandemic hit, but by the middle of April 2020 they were already at all time highs. When the chips were all counted at the end of last year, Peloton shares had tacked on more than 700% since the lows of March. 

Hero To Zero

There’s most certainly a different atmosphere in Peloton HQ now though as we head towards the halfway mark of Q2 2021. Their triple digit price-to-earnings ratio might have been sustainable with rates at record low and the Federal Reserve sending out dovish signals all last year, but since that narrative changed last quarter the bears have been baying for blood. In addition, Peloton has been plagued by recent reports of injuries and deaths caused by their treadmills, which have since been recalled en masse, leading to management warning investors to expect a $165 million hit to next quarter’s revenue as a result. But with shares having already been sliced in half, is there a case for considering the long side now? 

Late last week, Needham was one of the first to make the call that this current bout of selling is overdone and that the upside outweighs the downside at current prices. They reiterated their Buy rating and gave shares a fresh $125 price target. From Monday’s closing price, this suggests a solid upside of more than 40%. 

In a note to clients they called this the bottom and highlighted their focus on new products coming down the line which should more than make up for the short-term hit due to the recall. They added, “with more clarity on the recall, which we assume will largely be confined to the FY4Q, we like the risk-reward at these levels as we are closing in on the launch of the value tread in July. We expect it to be a transformative product launch for the company and should quickly become its second-largest SKU. We believe connected fitness has staying power beyond the pandemic given the convenience and affordability it brings to the consumer and PTON's lead should only grow over time”. 

Considering The Long Case

For any investor on the sideline impressed with this bullish tone, it’s worth noting that Peloton’s FYQ3 earnings were reported last week and confirmed that the company’s revenue growth is still powering ahead. In the midst of all the weakness in the stock, revenue was up 140% on the year and well ahead of the consensus. Bottomline EPS was also more than analysts were expecting and just barely in the red. The company’s digital subscriptions were up 400% while 12 month retention came in at a solid 92%. 

There’s no doubt that some major macro and micro factors have caused the recent sell-off, but is a 50% drop in a company that’s pumping out 140% year-on-year growth really rational? The stock’s RSI is down around 30 indicating extremely oversold conditions and exercise bikes aren’t going out of fashion anytime soon. If Peloton shares can manage to halt the slide and consolidate around the $80-$90 range, then it’s not too difficult to see them reversing this slide as the treadmill recall fades into the distance and tech stocks come back into favor again.