NSQ:PTON | Peloton (PTON) - Time To Go Short?

8th May '21 by William K

16 comments 1162 reads

Peloton (PTON), the US company that supplies exercise equipment, went from $25, early in 2020, to $167 as a result of the lockdown when many people started working out at home. The current price is $83.81, partly as the result of negative news, and partly because the lockdown boom seems to be nearly over. The chart pattern shows a classic head and shoulders with the neckline at $100. The price has fallen below the 30 week EMA and the stock is now in a Stage 3 decline. Over the last two days, there has been some energetic buying which has not lifted the price. Clearly there is a shorting opportunity here as the next real level of support is $25. The question is whether to wait for the price to rise back up to the neckline before going short, or whether to go short now before there's a further drop in price. Do any experienced shorters have any opinions?

PS Please note the chart is on a weekly frame.

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Edward Croft

8th May '21

On a non-investing note, it's worth hearing from a customer. I do not own shares.

I've been a hooked cyclist ever since I did a charity ride a few years ago. Before Covid I used a Digme Fitness spin class round the corner from my office about 3 times per week - Digme in the UK is like SoulCycle in the US - great instructors, great sound system, lights , 50 bikes in the same room. Digme is an amazing spin experience but Covid obviously has hit it very hard - you don't want to be in a sweaty room with 50 others during a pandemic.

Without real world spin classes and facing a winter of getting fat - I bought a Peloton at the end of last Summer. They said it would take 3 months to deliver - targeting a December 11th date. I thought given all the Covid demand that it would struggle to hit the date. I spent about £2.2k on the bike, and signed up to a £39/month plan for a few years.

Fulfilment was 2 months early. It was delivered in a Peloton van with well informed staff who installed the bike and evangelised the experience.

I was hooked immediately. About 7 months later I'm using it 3 or 4 times per week and have never been fitter at this time of year. My wife uses it several times per week, as does my 21 yo daughter whenever she's home. My teenage sons are a bit too lazy to bother - but they've used it every now and then.

So it's probably delivering 6-8 classes per week for the family. Maybe 364 classes per year. Over 3 years I'll pay £2.2k (purchase) + 39*12*3 (subscription) = £3.6k for more about 1100 classes.

That's £3 per class versus £12 per class in the real world. Would I pay more - absolutely. Sure - many people might not be using their bike as much.... but it's still a better deal than going to real world classes if you use it once or twice per week.

Why would I stay loyal and not switch to another provider or bike ?

Excellent instructors. I tend to use just a couple of instructors. You tend to find one or two who don't annoy you and whose taste in music is ok.
Huge library of content. Spinning is all about cadence - and cadence is best done to the beat of good tunes. They have an amazing amount of content, and have a growing 'artist series' with whole classes to the music of single musicians/bands.
Data History. Basically it's all gamified and I'm constantly trying to beat my previous stats in classes that I redo again and again. I may end up having a heart attack, but it works.
Super user experience. It's great fun and addictive, intuitive to use. It's also a surprisingly good music discovery device - I've got it synced up to Spotify to save tunes when I like them.

Why not just use a real bike? Well I've got one of those too - with all the gear - with Wahoo monitors all over it. I'm just road biking less. And it's rainy.

---

In terms of the investment case. I have to admit I've always found the shares way too pricey for me since I became a customer. I won't be buying at a StockRank of 27.

BUT - the bad news that's come out about their running machine may provide a rare opportunity to become a shareholder - I'm sure it can go a lot lower - but I will definitely be a buyer at the right price. I know the revenue retention rate is very high, so this is a very sticky revenue business and it's likely to compound over time. I will do a deeper valuation investigation at some point.

William K

Many thanks Ed. An interesting and constructive personal viewpoint. Yes, I'm sure the basic business model is sound, and the devices are addictive. $PTON are far from being dead and buried. The question is how far will the price fall before it finds support. There's a kind tentative of support at $50 and a more convincing level at $25. Donald Pond, via Twitter, has informed me that Baillie Gifford are buying Peloton for their positive change funds, and BG usually know what they're doing.

Despite that glimmer of hope, on the balance of probabilities, I think the price has to go down to $50 (if not $25) before rebounding - at the end of last week, two desperate days of high volume buying did nothing to revive the price, and that's usually an ominous sign. At $25 I would certainly consider buying. The bad news for Peloton concerns the fact - as I'm sure many Stockopedia subscribers know - that they failed to withdraw certain products after a child's death and the US investors will take a dim view of that. The first couple of days next week will be a good indication of the short term future of the share price. If the price goes back up to to $100 and stutters, the risk:reward ratio of a short will be skewed in favour of the shorter. A stop of $5 vs a potential gain of $50 or $75. Hard to resist.

unbelievablejeff

9th May '21

I don't trade US shares currently as my Stocko subscription is only UK. I have been taking a bit more of an interest in the US recently though. I saw the bad press around the Peloton treadmill. My brother has one and they have been told by Peloton to stop using it. It did get me thinking also on a short idea but perhaps a bit early on in my direct investing career for things like this!

I don't know how accurate /reliable the Wall Street Journal but here the short information I found on Peloton on their website.

That's a useful bit of information about the short interest, thank you, and I have no reason to doubt it.

There has been significant short interest since October last year, and that didn't stop the price peaking in January. Indeed one of the paradoxes of short interest is that it is often accompanied by a rise in share price (not so long ago the Tesla shooters and the GME shooters got badly burned). At the moment, I'm inclined to forget the short interest and focus on the share price movement. The shares are 'overpriced' with a PE of 185, and unless PTON can convince the market that EPS will grow, the price will crash.

mojomogoz

Narrative never dies...

sam19

10th May '21

In hindsight the shorts on PTON were April 16th & 29th. It looks very difficult to manage risk at the moment unless maybe using Fridays high of the day as a stop.

I've been experimenting with shorting this year using a couple of basic techniques. I've left my email in my profile if you want to get in touch I can send over some stuff. My subscription runs out today and I'm not at my desk.

UK_Investor_8888

Edward - you'd make a superb life coach!

Spl183

My 2 pence worth is that - being a regular viewer of CNBC - the bikes really seem to have have caught on over there, and general views from those who are long is that, they are more cost effective versus attend spinning classes at the gym over the long term. There is a loyal following on subscribers, and a large proportion of those, similar to Ed, are hooked. The re-opening effect also means that folks' are becoming more self conscious again about their figures, etc. Plus the logical image in ones' mind; a sweaty spinning class would be a hot spot for spreading viruses, may deter people attending gym classes so much in the near future. A US trading group which I'm part of, focusing on TA / charting set ups, see PTON as being oversold, albeit will maybe will see some more sideways/ range bound action for a period to allow compression before a rebound to the upside ...

Best of luck however you wish to trade this stock.

Cheers, spl183

Neil D56

14th May '21

Hey Wilko- you getting ready to short at the neckline??

In principle, yes. But with a tight stop - <$5. What I will do actually is to wait for it to fall back a bit from the neckline as a confirmation. Say let it hit $101 or $102 and then drop to $98. We don't want to be burned by a bunch of millennial retailers scenting a bargain.

Yeah get your drift- I think Gamestop showed us how the fever can get a second wave! Although that was never a bargain......

Think I'll join you with a small opener then build if it shows weakness

17th May '21

Gone short today at $91.74 with a $2 stop loss. It went up to $96.87 (up 3%) on the bell and then started to fall. Usually an ominous sign for the share price.

Breakout Trader

I'm with you on this one Wilkonz, I like the setup, price is below the key averages on the daily with a nice retest and rejection off the neckline, looks like downwards momentum should continue.

My target profit is 2R.

hp01

Great comment Ed - You must be older than I first thought! I had no idea you had a 21 yr old and teenagers. What is your secret? If it's cycling, I might have to be the next Peloton customer!

18th May '21

The price went down to $89.45 and then recovered to $92.44. I'm probably going to get stopped out today. Not too worried as the initial bet was small. If I get stopped out, I'll wait and try again later - hopefully at around $98 after it hits resistance at around $102-103. The trading range was $7.50 yesterday so everything's a bit volatile. I think this one could drop to $50 or lower. But I'd be more than happy at $70. It is said that the head and shoulders is 83% accurate at predicting a sustained price drop, so the odds are in our favour.

gus 1065

8th Nov '21

Wondered if you ever followed through on your short here as I see the price dropped 35% to about US$55 last Friday on the latest earnings/outlook report.

Gus.

Peloton (PTON) - time to go short?

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William K

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