If you’ve been following my posts about Peloton (PTON) and taken my advice, you’ve done quite well for yourself. Just to recap, back in December 2020, I explained why, at $161 per share, Peloton was grossly overvalued and, therefore, recommended shorting the stock.
Then, in May 2021, I followed up with another post detailing how correct the prior advice had been. At the time of that post, Peloton had lost about half its value, falling from $161 per share to $83 per share. I said, however, that there was still time to profit from selling this stock short, as I thought the proper valuation for Peloton was about $28 per share.
Well, here we are. Peloton right now has broken through my $28 valuation, falling to $24 per share. My advice now is to close out your short position and take your profit. While the stock may continue to drop a bit more, that’s simply investor panic and/or price momentum.
In summary, had you purchased $1,000 of June 2022 deep out-of-the-money puts back in December 2020, you’re sitting on a tidy profit, upwards of $200,000. If you listened to me and are cashing in, well done! And if not, shame on you.
Back on December 22, 2020, I detailed why Peloton Interactive (PTON), with a market capitalization of $42.2 billion was ridiculously overpriced at $161 per share. I recommended selling your shares if you were an owner or shorting Peloton if you weren’t.
Today, Peloton closed at around $83 per share, with a market cap of $24.3 billion. So had you taken my advice and shorted 100 shares, you’d be sitting with a $7,800 profit representing a whopping 145% annualized return.
While some of Peloton’s price decline is attributable to recent issues with defective equipment requiring a product recall, the decline in price began much earlier, as savvy investors began selling their positions to less sophisticated investors who were jumping on the Peloton bandwagon.
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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.
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