Peloton Interactive (PTON), the innovative company that pioneered gluing an iPad to the handlebars of a stationary bike, this week was added to the NASDAQ 100 stock index. Based on a market cap of $42.2 billion, Peloton became one of the 100 largest non-financial companies traded on NASDAQ.
With only a market cap of $5 billion prior to the pandemic, in the past nine months Peloton’s market cap has soared past much better-known companies, such as Marriott, Mitsubishi Electric, General Mills, Fiat-Chrysler, eBay and the Ford Motor Company.
With the size of the home fitness market currently at $11.5 billion and Peloton yet to generate a profit on $1.8 billion in revenue, one wonders about the company’s valuation. I always view things from the perspective of a buyer or seller. So, if a buyer purchased Peloton for $42.2 billion, what would their return look like? A simple, “back-of-the-envelope” analysis would look something like this:
If the buyer instead bought 10-year Treasury bonds, they’d get a 0.9% return. Pretty poor, but very safe. If the buyer bought a high-yield junk bond fund, the return is about 4.5% and high-dividend ETF returns are in the 5% to 8% range. Thus, an investor writing a $42.2 billion dollar check to buy Peloton, a high-flying company who’s growth has been driven by a “once every century” pandemic, would want a return in excess of 10% as compensation for assuming such huge risk.
A 10% return on a $42.2 billion investment is approximately $4.2 billion. If we assume companies in the home fitness industry have a 12% EBITDA (earnings before interest, taxes, depreciation and amortization), sales of $35 billions are required to return $4.2 billion in EBITDA.
Since the entire home fitness market is currently only $11.5 billion, in order to justify a $42.2 billion valuation, that market would have to triple in size and Peloton would have to command 100% of it.
Oh, and then there’s the issue of Peloton not yet having any EBITDA at all.
Conclusion: if you own this stock, sell it now. If you don’t own it, short it.