Peloton: Wait For The Crash, Then Buy The Stock

Summary

• More than a few readers branded me crazy when I labeled Peloton a future dividend aristocrat.
• In this article, I still take the long view on the company, though not quite as long.
• If Peloton ends up a dividend aristocrat, I might not be alive to see it - and I'm 45 years young!
• However, there's more than good reason to buy the stock now, particularly on the crash that will likely come alongside eventual resolution of the pandemic.

In a recent Seeking Alpha article, I labeled three stocks - Apple (AAPL), Starbucks (SBUX), and Peloton (NASDAQ:PTON) - future dividend aristocrats. That last one rendered me crazy in the eyes of many. This is fine. Hardly unexpected. While I can see why you might think the notion of high-flying Peloton becoming a dividend aristocrat sounds insane today, don't dismiss it out of hand.

But setting what could happen decades from now aside, don't dismiss Peloton as a great growth stock to buy today or, better yet, on the eventual weakness that's sure to come.

Did you see Netflix's (NFLX) red envelopes in mailboxes from coast to coast in the early 2000s and dismiss the company then?

Did you blow off Apple (AAPL) as iPod led to the ubiquity of iPhone?

Did you consider Amazon.com (AMZN) a fad as mail carriers tossed its iconic boxes over every fence on your block? Hopefully not, because it now takes a fleet of delivery drivers, of multiple affiliations, to deliver Amazon's mail.

With this in mind, we'll all be better off if we don't have the same conversation around Peloton we had around Netflix and Amazon (less so Apple) 10 years ago. I led the bearish the charge on Netflix. I was unabashedly bullish Amazon. So I have experienced and reflected on both sides of the story.

The lesson - I spent years lamenting Netflix's balance sheet. Anti-Amazon folks cried because it "didn't care" about turning a profit. Both stances proved nothing short of idiotic. They were definitely flat wrong. Netflix and Amazon put every dime they could get their hands on back into their respective businesses. They did it differently, but with pretty much the same general mindset.

The success of these two stocks alone should stop us from treating today's Amazons and Netflixs the same way. I don't make this argument to persuade you into thinking I'm correct about Peloton. There's a high probability I'm wrong. Of course, I might be right. The truth will likely end up somewhere in between.

I make the argument because the financial metrics of a hyper growth company disrupting established spaces and carving out its own areas to exploit don't always look good. Amazon and Netflix showed us this. It's history. And it doesn't lie. It should inform us and lead us to, if nothing else, an open mind.

Wait Until People Say "I Told You So"

Here's what I think is going to happen.

There will be some type of end to the pandemic. Maybe a soft ending (we haven't eradicated it, but can return to something close to normality with limited public health interventions). Maybe a hard ending (it's gone). However it shakes out, when the market thinks it's effectively over, the COVID-19 stocks that have done so well will tank. I expect Peloton to be among the worst performers.

We'll see a chorus of people saying "I told you so."

This will be the time to buy the COVID-19 stocks that come back and sustain.

I'd consider taking a relatively cautious approach.

Some stocks will go down in the carnage with little, if any, basis - say Home Depot (HD) and Microsoft (MSFT). I'd buy essential stocks and big, proven tech names here.

Then there's the class of stocks that includes tier one story stocks. Zoom (ZM) and Chewy (CHWY) come to mind. Will people return to the office and to the pet store in large enough numbers to render these businesses relatively listless?

Investors will have to make choices among this large pool of names. Some will have taken profits already. Others might buy on weakness. But you can make a case most people can at least understand the story, even if they're not willing to embrace it, on these types of companies.

Then there are the Pelotons of the world. Pure story stocks. Story stocks many investors consider inextricably linked to the pandemic. I completely comprehend and even appreciate this point of view. In some cases, it will end up being a solid call. Just not in Peloton's case.

The Pandemic Accelerated Trends

We're told people we're already leaving cities. The pandemic only exacerbated the trend. We're told work from home already was becoming more of a thing. The pandemic simply helped accelerate the trend. I don't know if either of these things are true (I have seen good data/arguments on both sides and more moderate takes somewhere in the middle). But I do know the pandemic has played the role of moderating variable in quite a few relationships that existed prior to its arrival.

Along this line of thinking, the pandemic has benefited some companies that set up shop, outlined a vision, and started to execute before COVID-19 hit. It's not as if Peloton sprang up in response to COVID-19. It already was here with a well-articulated plan on how it intends to move forward building out its ecosystem. The pandemic gave Peloton a boost.

Peloton would have gained traction without a pandemic, just not as quickly as it has. It's crucial to remember this before you debunk the company. It's also kinda funny to say the company doesn't have a moat. I'm not sure Netflix or Amazon ever had moats. They just did what they were doing better than anybody else and innovated in and around their spaces more effectively. Sometimes just being better - and more visionary - is enough of a moat.

Speaking of Peloton's vision. This is the company today:

Source: Peloton Investor and Analyst Day Presentation, 9/15/2020

This is an ecosystem every bit as good - or with as much potential as - Apple's, Amazon's, or Netflix's. It just exists at a different scale and scope. Peloton has room to offshoot from each of the "tech stacks" it details in that slide.

Peloton considers itself a disruptor and it absolutely is:

Source: Peloton Investor and Analyst Day Presentation, 9/15/2020

While there's no guarantee it will continue on its present trajectory, Peloton currently disrupts in a space ripe for disruption. In terms of international expansion, amid hyper growth, Peloton reminds me of Netflix in the days when that company had a litany of bears chiding it (present company included!).

Source: Peloton Investor and Analyst Day Presentation, 9/15/2020

I love Peloton's public strategy and have confidence it will continue to execute on it. It's building a formidable health and wellness ecosystem that's disrupting brick and mortar operations. The pandemic hurt gyms and related venues. Peloton was able to step in and pour salt in the wound. This combo might keep many fitness centers down - and, quite possibly, out - forever.

However, the thing that excites me most about Peloton is what we don't know. I haven't had the chance to speak to management yet, but I hope to. Based on what I infer from reading their public statements and presentations, they likely have big ideas. Lofty ones.

In the future aristocrat article where I included Peloton, I threw out the idea of partnering with Starbucks (SBUX). Starbucks has some large format stores where you can absolutely hold indoor classes and promote not only the bikes, but the Peloton ecosystem. With the way we're using outdoor space these days, the possibilities are limitless.

One of the other stocks I love these days, CVS Health (CVS), might even be a better partner for Peloton. The same type of in-store experience could work and makes even more sense given CVS's footprint, business plan, and innovative/synergistic ambitions.

But I'm not here to make suggestions to management. (OK, maybe just a little). I'm here to say that investors should give the Peloton ecosystem the credit it deserves. If it stopped where it's at now, built out its present interconnected ecosystem, and took it international, I'd probably still be bullish. But I'm carrying the torch for the company because I think it has much more in store. These things can make it not only a comprehensive and sticky ecosystem, but a dominant one.

These "things" might not be the exact ones I'm riffing about. But where there's one bad or good idea, there are dozens, if not hundreds of other bad and good ideas. And because I feel pretty confident that Peloton's business plan wasn't lets build a bike and a treadmill and see what happens, I think they're thinking along similar, even if not the same exact lines as I am.

Investor Takeaway

Bottom line. Peloton will probably crash. More than most other COVID-19 stocks, investors see it as a pandemic play. If you want to buy the stock at a lower price, you will likely have the opportunity to take advantage of this false perception.

Ecosystem plays scare lots of investors. Nine times out of 10 they're going to be "overvalued." Netflix and Amazon - and others - have taught us that valuation often doesn't matter. When you have a decade's (or more) long growth runway, investors will always bid your stock up on this anticipated growth, especially if it's exponential. So you have to vision the story as an investor. It has to resonate with you.

Peloton's story absolutely resonates with me. I don't buy stocks that don't pay dividends, however I might make an exception when the inevitable pandemic stock correction takes place.

Disclosure: I am/we are long AAPL, SBUX, CVS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.