Sizing Up The Long Play In Peloton Stock

Peloton’s (NASDAQ: PTON) Relative Strength Index (RSI) score dropped below 30 yesterday for the first time since last March and made more than a few investors sit up. The RSI is one of the most widely used signals that helps investors understand if a stock is overbought (above 70) or oversold (below 30). With upwards of a 45% drop since hitting all-time highs in January, Peloton shares are firmly in the latter camp. They’re back trading around the same levels they were at in September and November, and indeed have bounced off a solid support line that’s been in place since then.

On Monday of this week, MKM Partners was the first to put their hand up and call the current bout of selling overdone. They upgraded their rating on the exercise bike company to a Buy from Neutral and pointed out the enticing buying opportunity opening up. For those of us still on the sidelines, it’s hard to argue with it.

Starting To Look Oversold

MKM analyst Rohit Kulkarni expects the company to maintain their forward momentum even as more and more people receive the COVID vaccine and rotate out of a stay-at-home mindset. He pointed out that Peloton has a ton of potential in the longer term as they start to position their products with the likes of gyms and hotels. More immediate concerns about low inventory will hopefully soon be remedied by management’s investments in air and ocean freight supply chains.

This has been one of the main arguments from the bear camps in recent weeks, with supply delays almost guaranteed to hurt the company’s revenue and profit forecasts. But is it fair to say that after a 45% drop in the share price, this potential downside has already been baked in?

Kulkarni also had some interesting first-hand experience-based points to make, including the fact that his own Peloton Bike+ order was recently delivered ahead of schedule and that the company’s ratings on the Better Business Bureau have been steadily improving so far in March.

As recently as last month, Peloton’s fiscal Q2 earnings report showed revenue growing at a staggering 127% year on year, while EPS was 80% higher than analysts expected. Sure, there’s an argument to be made that a price-to-earnings (P/E) ratio in the triple digits is hard to sustain, but we’re also talking about a company that has made the absolute most of the COVID pandemic and looks set to retain their position as a market leader.

Getting Involved

As the tech market, in general, takes a breather, it’s a great time to be holding some cash and weighing up longer term opportunities. With the NASDAQ index throwing a bit of a tantrum at the threat of rising inflation and rates, Wall Street is being forced to recalibrate the valuations of these high-growth companies. Peloton caught the upside of a black swan pandemic this time last year, and is also catching the downside of a return towards normalcy too.

The onus is on the company to prove it’s not a flash in the pan stock, but can mature into one of the leading exercise equipment stocks on the market. Investors willing to back the long-term potential have an appealing entry point at current prices, as buyers have consistently stepped in around the $96 mark. With the RSI below 30, you also have the odds on your side for a reversal of the recent selling. If we can get a bullish crossover in the MACD in the next few sessions, all the better.

With the big money continuing to rotate towards recovery stocks and into value versus growth names, it’s possible that we won’t see the seemingly daily all-time high prints in the NASDAQ that we were so used to last year. But that doesn’t mean opportunity still abounds for fast-growing companies, particularly those that are potentially trading at a significant discount.