Peloton’s exercise bicycles can cost around $2,000 to set up.
Courtesy Peloton
Almost everyone’s lives have dramatically changed during the Covid-19 pandemic. The question that now confronts investors is if those changes are permanent, or fleeting, or some combination of the two.
Peloton Interactive (ticker: PTON) is right in the eye of the storm.
After gaining some 400% over the past year, Peloton’s shares have stalled ahead of second-quarter earnings that are expected to be released in early February, if last year’s Feb. 5 date is indicative. The sudden halt to an incredible rally suggests that investors are unsure if the answer to the question will continue to benefit Peloton’s exercise-at-home business or if the nation will rush back to gyms when mass vaccinations end the pandemic.
Peloton’s exercise bicycles can cost around $2,000 to set up—and then there’s the $39 monthly exercise-video subscription that is streamed to screens on the bikes. Before the pandemic, the bikes were often dismissed as expensive playthings for the rich and over exercised. But Peloton has surged in popularity during the pandemic as a way to exercise, and as a stock, as the virus kept people from gathering at gyms. The demand for the bikes has proven so high that Peloton bought Precor, a less-hip bike maker, in an attempt to enhance production to satisfy demand.
Soon, all of that will collide with a new reality. Efforts to vaccinate people against Covid-19 could help life soon return to normal. Many people are anxious to once more be together, eat at restaurants, go to the movies, and maybe even return to gyms.
At the same time, many people have learned over the past year that they can get excellent workouts from home, and that they can get access to first-class trainers through Peloton and trainers who stream workout routines.
It arguably makes sense to position in Peloton in a way that aligns with a belief that Covid may have sparked a structural shift in the exercise industry. Some people will clearly exercise at gyms, and some people will exercise at home, and many will likely do both.
Oppenheimer is telling clients that Peloton is well-positioned. Analyst Jason Helfstein recently advised clients that Peloton is expected to beat near-term subscriber estimates. In a recent note, Helfstein advised his clients that gym usage faces a long recovery. He believes that Peloton has the potential to acquire Covid-induced gym cancellations and that the Precor acquisition presents the company with the chance to upsell.
As of Sept. 30, Peloton had more than 3.6 million members, and total quarterly workouts were 77.8 million. The 12-month retention rate was 92%.
Ari Wald, Oppenheimer’s technical strategist, advised clients to consider buying Peloton stock because the stock’s bullish trend is intact, despite recent weakness, which suggests shares could trade to a new high above $171, which stands as upside resistance.
For investors who agree with the thesis that Peloton is well-positioned, the recent stall in the stock is an opportunity to buy on weakness.
With Peloton’s stock trading around $155, aggressive investors with the money to buy Peloton stock could instead sell the February $150 put option for $9.60 and buy the February $160 call option for $10. The “risk reversal”—that is, selling a put and buying a call with different strike prices but the same expiration—positions investors to buy the stock on declines and to participate in any advances.
If the stock surges on earnings, the call will increase in value. At $170, just below the stock’s 52-week high price, the call would be worth $10. The great risk—and it is real for any equity that has gained 400% in a year—is that the stock is priced for perfection. Should the company deliver anything that is not equally perfect in results and outlook, the stock could tumble. Should the stock be at, say, $120 at expiration, investors would be obligated to buy the stock at the put strike price, or they would have to pay top dollar to buy back the short put.
During the past 52 weeks, the stock has ranged from $17.70 to $171.09.
The risks of the strategy are real, but if you believe that Peloton is plowing fertile new ground in the exercise industry, then the current pause becomes an opportunity for long-term investors with the resources and stoicism needed to handle hot stocks in volatile times.
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