Macro Dragon: Reflections on Peloton [PTON] $92, -46% from its peak, +15% from recent lows

Macro Dragon: Reflections on Peloton [PTON] $92, -46% from its peak, +15% from recent lows

(Note this piece should have been published on Tues, yet due to a technical glitch it was delayed. PTON closed on Wed @ $96.55)

Top of Mind…

• It goes without saying that when an equity analyst is talking about a stock (or valuations in general), one should raise one’s filter & bring a critical, yet open mind to the view as part of one’s own due diligence & research.
• Now when a Macro gal or guy starts talking about a stock, well one best +3x their filter & critical framework. Also worth noting all formal Saxo House Views on equities & single name stocks are at the discretion of our dedicated equity strategist Peter Garnry, as well as our CIO & Chief Strategist Steen Jakobsen – who recent Macro Digest can be found below:
•  Macro Digest: Sell in May and go away. Also, German politics turning hard left! Bottom line – official house view is taking risk lower by 50% exposure by the end of April (note was 20 Apr), given the epic run in 2020, as well as explosive start for a lot of assets in 2021.  
• Also for those that cannot get enough about inflation, KVP recently watched the first part of this recent interview of Jakobsen that also extends into Macro, Geopolitics & Cross-Assets.
• Commodities Boom Only In 'Early Innings', Much Higher To Go | Saxo Bank CIO
• With all that said, we’ve had a number of VIP clients here in the Asia Pacific – from Family Offices, to Hedge Funds, to UHNWs – asking about certain names, as well as having a default bias of being long equities over the long-term. The tactical decision making being around when to lighten up or get heavier over a few times a year.  
• So we got a few names to touch on over the course of this & the next few weeks, including Peloton, Coinbase, Beyond Meat, Compass Pathways, Square, AirBnB, to name a few.
• The one thing that these very different companies have in common, despite being very different businesses, is they have been getting smoked in the recent sell-off.   
• From a Macro lens, its never going to be predominantly valuation or solely driven by bottoms-up fundamentals, its whether there seems to be a high probability of multiple tailwinds (for longs) or headwinds (for shorts) coupled with a name being oversold (or over bought) giving one potential ‘margin of safety’.
• If there are other names that are screaming convictions on your respective radars, or you just wanna talk up your own book – feel free to send through some bullets on the rationale of your short or long. Speaking of shorts, look’s like The Big Short’s Michael Bury is building a mammoth short in Tesla with over half a billion dollars wagered in long puts (smart at least in that construction, as opposed to outright).
  
  

Peloton [PTON] $92.29 Price, $27.5bn Mkt Cap

• Likely a lot of you that don’t know Peloton [PTON] that well, may still heard about the company during the remote-stocks mania of 2020. Others perhaps have even worked out on some of their equipment (which can be found in gyms) or joined one of their live instructor & group classes, or even have a full blow-out Peloton bike or two at home.
• Yet the price action stemming from both a broader market systematic (similar growth tech remote themed names getting killed)  & focused unsystematic event (recall of thousands of treadmills), to KVP at least, warrant a investigation into the name.
• The product-service error in many different companies, across industries from the likes of recalls from Toyota, Tesla or e-coli issues with Chipotle years ago, etc.
• From a systematic perspective, the growth & tech space still seems to be on the back leg of the market – given a combination of stellar performance in 2020 – as evidence by the ARK Innovation etf [ARKK] which is down -17% YTD, after a +152% uplift last year.
• PTON did +434% in 2020, topping ZM’s (Zoom) c. +395%, yet falling well short of TSLA’s +743% in 2020.  
• After the death of a child & over 70 incidents reported, Peloton voluntarily recalled its Tread+ Treadmills for a full refund. Here are the recall statements from Wed 5 May from Peloton & the CPSC (Consumer Product Safety Commission)
• Peloton is now down -46% from its peak of $171.090 (14 Jan 21) & is up c. +15% from its recent $80.48 low of 6 May 21.

The Bearish Case

The bearish case for the name would focus on a number of things including:

• The recall announcement was on May 5^th, yet the stock was already heavily off the highs by -40%. This no doubt linked to the sensational & exuberant performance of these ‘remote stocks’ in 2020, where Peloton finished the year up +434%
• All the ‘remote stocks’ did was eat their future lunch & earnings, so as the US (& RoW) steadily goes back to re-opening, they are going to be repriced lower. PTON is still +224% since the start of 2020, the stock has plenty of downside.
• Cockroach theory on the recall of its Tread+ Treadmill, what if there are more product & equipment issues, leading to more recall. These are key risks of potentially more bad news to come that cannot be ruled out.
• It will take time to regain consumer trust & rebuild a damaged brand.  
• The name is in the growth bucket & we are entering a regime where value is going to be outperforming growth, as also generally speaking value stocks are more geared towards a reopening & more cyclical towards a world where inflation & rates seem set to rise.
• The short interest days to cover ratio is at 2.0x down from the 3.2x highs of mid Apr.  

• Valuations are still stretched with Peloton trading at 152x fwd P/E ratio, with a price/cashflow ratio of +73x. Also being a growth stock there are no dividends that help to de-risk an investors capital overtime.  
• From a weekly chart technicals perspective we’ve broken a key Fibo retracement of 50% & closed below the crucial 94.40, which likely opens us up for a test of the 76.30 & perhaps even 53.90, fibo lvls of 61.8% & 76.4%. The wkly MACD continues to trend down & the daily looks set to roll back down.
• Things don’t go down in a straight line, all we are doing is getting ready to make another big leg lower. A weekly close above 112/113 – both key 200DMA & Fibo lvls – would likely refute the timing for a bearish move lower.
• From the Dragon’s perspective a NAV Allocation framework here could warrant 5-10%, whilst from a trading-stop perspective the risk would be 1-2% of one’s capital. Tgts for the bears could be an initial move to $76 (-17%) to $60 (-35%) for the tactical leg of the position, with the 'core' being a long-term play for around $55 (-405). Would also potentially instill a trailing stop of $20 on the triggering of the first tgt.          
  
  

The Bullish Case

The bulls would naturally be inclined to say that if the lows are not already in, the worst has been priced in.  

• The technicals are actually bullish, as a 50% fibo retracement is quite ‘healthy’ for the price action of a bullish security. Especially given the strong performance in 2021. Whilst the bears would argue to momentum is to the downside, the bulls will pull the contrarian card on Peloton.
• Also two wks ago the name was down c. -15% on c. 210m shares, +4x the YTD wkly avg. of 53m, a sign of healthy capitulation. Last wk the stock was up c. +15% on 140m shares (2.6x YTD wkly avg), which potentially also indicates a strong follow through on the higher price & the lows having been put in.
• Company proactively recalled the entire Tread+ line of treadmills, which were also not initially mass distributed but were on an invitation only basis. The takeout of this entire model, puts the safety concerns to rest. So worst news should be in.
• In a US population of +330m, Peloton has just under 2m subscribers (think cashflow model like a stream of bond coupon payments), that not even 1% of the population. The international markets have still not even seen the low hanging fruit being hit yet.
• The brand is a lifestyle association brand (think Apple, Tesla), that capitalizes on the wellness, health & fitness structural trends that one tends to see in richer economies. As well as being part of the decentralization movement that brings less friction, more autonomy & flexibility to the end user. There is a skew towards the younger generation that will bode well as millennials (biggest demographic group since the baby boomers) start to enter their peak earnings & spending over the next 2-3 decades. Peloton equipment & classes are also being used at gyms & other training facilities.
• At a market cap of sub $30bn, its not a crazy expectation that the company could be worth $90-120bn (+3-4x) in 5-10yrs. I.e. The Amazons & Apple’s of the world at +$1-2 trn in mkt cap start to run into the law of large numbers, where the probability of them doing +3-4x over the next 5-10yr is quite low. Today Apple at $2trn is c. +2.4% of the $84 trn global economy, that’s just mind boggling. Apple’s value is almost 10% of US GDP. Peloton’s is barely over 0.10%.  
• And worth noting consensus estimates is still for Peloton to do +$5.3bn in rev for 2022,  with top-line growth of +31% (post what is forecasted to be +120% for the full 2021, at +$4bn). Whilst PTON is still very much a growth stock, its worth noting its EBITDA is positive – this is not NKLA that at one point was at c. the same mkt cap with negligible revenue, let alone RV Trucks that worked (NKLA by the way is still a $5-6bn mkt cap).
• Also there is still a lack of appreciation on the subscription model for their classes & training programs, that they continue to build besides selling fitness equipment.  
• With a close yest of $92.29, a technical break of the recent low of $80.48 (-13%), or even more importantly $76.30 (c. -17%) would constitute a review of the thesis and/or closing of the position.
• From the Dragon’s perspective a NAV Allocation framework here could warrant 5-10%, whilst from a trading-stop perspective the risk would be 1-2% of one’s capital. Tgts for the bulls could be an initial move to $112 (+21%) to $134 (+45%) for the tactical leg of the position, with the Core being a long-term play for above $150 to a retest of the c. $171 highs. Would potentially also be worth instilling a trailing stop of $20 on the triggering of the first tgt.          

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Start<>End = Gratitude + Integrity + Vision + Tenacity | Process > Outcome | Sizing > Position.

This is The Way

Namaste,

-KVP

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