Peloton; Cycling out of control >>

As of the time of writing this article, Peloton’s stock has fallen over 77% from its 52-Week high. That’s a big sheesh.

To make matters worse, the company has become a complete laughingstock. From tweets calling out their “iPad on a bike” design to a hit television show pulling off a gag where one of their main characters dies while working out on their bike; the company’s brand has taken a big hit.

The only question; is this a realistic portrayal of the company and their future prospects as a whole?

The short answer is: Maybe.

Peloton’s hype comes from one place, and one place only: COVID-19. Their products were highly sought-after once states imposed lockdowns related to the spread of the coronavirus. With gyms forcibly closed for the foreseeable future, what could a health-freak do without proper fitness equipment? Run outside? No.

The answer is the Peloton Bike.

Now, raise your hand if you had a workout machine at home, that either you or your parental, purchased at any point in your existence. I know I’ve had several.

Most of the time, these machines are left sitting in a basement, or attic somewhere, collecting dust or holding coats and used panties. Home workout machines have been some of the biggest scams in human history. These companies capitalize on the idea that a person emotionally wants to lose weight but doesn’t have the will power to actually USE the machine.

But with Peloton, it was supposed to be different right? The pandemic gave the company a competitive advantage that seemed almost too easy.

No gyms = Peloton.

The former Wall Street darling grew their sales in the hundreds of percent, year-over-year, for nearly 4 quarters following the March lows. Everybody, who was anybody, was getting involved in the Peloton “ecosystem.” It’s no wonder that the stock grew over 860% in that time frame.

It felt like a never ending party that was just getting started. The near $50 billion company was being touted by analysts left and right.

Then… reality hit (I’m looking at you, Tesley Advisory Group)

Just as easy as it was to anticipate the company’s growth in the span of a year, it was just as easy to anticipate the downfall in the middle of 2021.

Peloton started the new year with declining gross profit margins and negative operating profit (strike one), then followed up in the second quarter with declining sales and continuous unprofitability (strike two), and finally the third quarter continued all three trends and saw the company lose a total of $376 million (three strikes; you’re out).

On November 5th, the stock fell as much as 36%. Since then, the stock has lost another 36% in market value. The once $50 billion company is now trading between $12 and $13 billion in market capitalization with little hope for recovery.

Where did they go wrong? Well, let’s discuss valuations.

At the peak of the company’s success, Peloton’s market capitalization was near $50 billion. That was bigger than the market cap of Chipotle (NYSE: CMG) (yes, that Chipotle).

Is it fair to compare Peloton’s stock to Chipotle’s? Well, every dollar I invest in Peloton is the same dollar I invest in Chipotle, so… I shall proceed.

Around the end of 2020, Chipotle was valued at $40 billion, or so, and produced around $664 million in cash from operating activities, meaning that the company was trading at 71 times their cash from operations. What does this mean?

Essentially, if Chipotle stopped growing, and produced the same amount of cash throughout the remainder of their lifetime, it would take them approximately 70 years to buy back their own company.

Now let’s look at Peloton around the same time;

At a $47 billion valuation, Peloton produced $854 million in net cash from operations for the twelve months ending on December 2020. That means the company was trading at 55 times their cash from operations. So, Peloton would’ve been the smarter investment right?

Chipotle was trading at a higher multiple, but was expected to easily rebound from store closures and pump more cash out of their business in the near future.

As for Peloton, the same could not be said.

With the re-opening of gyms and vaccines being handed out like stimulus checks, any intelligent person would expect for Peloton’s sales to decline while everyone would give up their bike for a chicken burrito bowl with extra guac and sour cream.

As of today, Chipotle is trading at 39 times their next year’s predicted cash from operations while Peloton is recovering from a loss of over a billion dollars of cash flow for the trailing twelve months. I think I know what stock I’d rather be overweight on.

So, to go back to beginning for a moment: Is this the end for Peloton? Should we short the company until it reaches a market cap so low it must be delisted from a major exchange?

Don’t go too fast, you might pop an artery (R.I.P. Mr. Big).

It’s not impossible for Peloton to produce $50 billion over its lifetime. Major changes at the company would have to be made and tons of innovation would have to be engineered for that to happen.

On one hand, Peloton’s competitive advantage has dissipated as it is no longer a “must-have” type of product. There are plenty of cheaper, and better, alternatives in the at-home fitness equipment industry, and nobody in their right mind would buy the latest Peloton Bike 2.0 (as if it was the newest iPhone) especially if they have a functioning bike at home.

On the other hand, maybe there inlays the solution to this company’s problems:

Apple.

If there is anything that Apple has done right over the last decade, it is their ability to develop new products to add to their portfolio and enhance their services business.

At its core, Peloton’s products are still wonderful. The bike and treadmill are sleek, convenient and generally safe (don’t quote their lawyers on this one). Nonetheless, there is plenty of room for expansion into other at-home fitness equipment, from elliptical machines to stair masters to even digitized bench presses that tell you how weak you are to your friends (something the market isn’t pricing in maybe, wink, wink).

Hell, they can even sell their equipment to gyms and collect revenue on that (another thing the market may have not priced in yet. Love me yet?)

The road to redemption for Peloton is long and tumultuous, and possible filled with more pain on ahead. But at $12 billion, there is opportunity to buy into a future of digitized fitness equipment with an “ecosystem” that will likely grow over time.

I’m issuing a “Buy… maybe after you try the gym out for a month” rating on the stock.