Peloton Hits a New Gear

Despite their shares taking a heavy beating with the rest of the equity market in March, over the past few weeks Peloton (NASDAQ: PTON) has joined the ranks of stocks that ended up hitting fresh all time highs in the face of the coronavirus pandemic. In light of many non-essential businesses shutting their doors because of enforced social distancing, plenty of names in the e-commerce and work-from-home industries quickly became popular with investors.

Amazon (NASDAQ: AMZN), Zoom Communications (NASDAQ: ZM), and Slack (NYSE: WORK) are some of the obvious ones. And with many people crying out for regular exercise in the face of gyms being closed, Peloton, with their state of the art exercise bikes and treadmills, has been another popular choice.

The company has been around for eight years and has a business model that’s centered around people working out on their exercise equipment from home or in the gym, taking part in online classes and live streaming their results. They got their initial funding from a Kickstarter campaign and quickly went through multiple rounds of private funding until they went public last September.

Shares were up about 30% from their IPO last January but then fell off almost 50% through the lows of March as a risk-off sentiment spread like wildfire through equities. They’ve since managed to put in a strong bounce as consumer demand surged and at the height of yesterday’s session were up more than 120% from those lows.

92% Growth in Subscriptions

With shares up 5% in Wednesday’s session, it looks like investors were eager to get some skin in the game in advance of the company’s fiscal Q3 earnings report which was released after Wednesday’s bell and it’s hard to blame them. While EPS was in the red and missed analyst expectations by $0.01, revenue came in above the consensus and showed growth of 65% year on year.

The company also reported subscription revenue specifically was up over 92% year on year, thanks to higher subscriber numbers than expected, helped no doubt by a churn number that’s at its lowest level in four years. Adjusted EBITDA was a profitable $24 million compared to the expected loss of -$35 million. It’s clear that management isn’t viewing this kind of jump as a flash in the plan and they raised forward guidance to let investors know that they plan to keep this momentum going.

Those investors who were long or got long yesterday will certainly have a spring in their step after those numbers. In Thursday’s pre-market session, shares were trading up by as much as 17% from Wednesday’s close as the bulls rushed in to get a piece of the pie.

Short Squeeze Opportunity

In April it was reported that at 43%, the short interest of Peloton’s float was the fourth largest in stocks with a $2-10 billion market cap. Their argument centers around the company’s price-to-sales ratio of 7x and the fact that they are still operating at a net loss. Still, if these bears and those who are short were nervous with the 30% rally shares put in over the past week, they’ll be at panic stations this morning and we could have a bit of a short squeeze on our hands if they start to unload.

In order to get out of their short positions which are going deeper and deeper underwater as the stock rallies, they’ll need to purchase the stock (opposite of those who get long by buying and then exit by selling). This kind of activity greatly increases the buying demand for shares in the short term and adds fuel to the fire.

It remains to be seen if Peloton can keep the momentum going after the coronavirus pandemic retreats, but for now, shares have never looked so appetizing. This massive change of societal habits in how we buy, work and exercise is well underway and likely to remain for some time. Peloton is doing everything right in capturing as much market share as possible.