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Bulls and Bears Alike Need a Reality Check on Peloton Stock

Peloton looks like a falling knife after disappointing earnings. But this appears to be a case of a stock trying to find a price that accurately refle...

This story originally appeared on MarketBeat

Peloton (NASDAQ: PTON) stock is dropping the day after it reported lackluster earnings. The company also finds itself in legal trouble as the Department of Justice is subpoenaing the company regarding multiple accidents involving Peloton’s Tread+ treadmill.  

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Anytime a company faces issues regarding product safety, it’s cause for concern. However, Peloton stock has been on a slow descent since the beginning of the year. When all is said and done, this is looking like a case of what comes up must come down. And when a stock like PTON went up as fast as it did; it’s bound to fall hard.  

This is especially true because the reason that PTON stock was rising wasn’t because the company had a superior product. Rather it had the right product for the right time. Now the company’s captive audience may be looking to get their fitness kicks outdoors or back in the gym.  

However, it’s been almost two years since Peloton went public. In that time, investors have been living in the two extremes, neither of which reflected the reality of the opportunity. The challenge for investors is to decide  

No Pain, No Gain 

One thing that notoriously crushes an exercise plan is irrational expectations. An individual’s fitness journey is not a quick fix. Slow and steady progress is generally what delivers results. And as anyone that makes a commitment to exercise will tell you, progress is not always linear. 

This brings me back to PTON stock. When the company first began trading publicly, it almost immediately got embroiled in a controversy over a television ad. The stock struggled to gain traction on weak revenue and negative earnings.  

But once the pandemic hit, Peloton had the last laugh, at least for a little while. Yet, even the most bullish Peloton investor had to admit that the company was unlikely to see that rate of growth continue. If you believed otherwise, you were guilty of irrational expectations.  

Which brings us to where we are today. And yes, slowing growth is a major part of this story. The company is facing a combination of supply chain issues and parts that are unavailable due to the global chip shortage. However, the company is still growing.  

When Trends Collide 

As Peloton stock drops, the conventional wisdom is that the company will find growth slower to come by as more individuals return to the gym. And Peloton’s management certainly is giving a nod to that statement by lowering its guidance. 

However, it’s important to point out that many Americans invested in home gyms last year. As weeks of business closures turned into months of working and exercising at home; and with winter arriving in the northern U.S., homeowners used stimulus money and discretionary income to create areas where they could exercise conveniently and safely.  

And as homeowners will tell you; once that sunken cost is in place there becomes a huge incentive to use the space. I don’t have a crystal ball, but gyms and fitness centers were struggling before the pandemic. I imagine that many people who have embraced a home fitness routine are not necessarily looking to go back to the gym. And that bodes well for Peloton’s subscription service. 

Plus, Peloton recently launched a corporate wellness program. But this isn’t the case of putting fitness equipment in the office. This is about allowing employers to give employees this benefit so they can workout wherever they are working. It’s a clever spin (no pun intended) on a trend that will be essential to employee retention.  

PTON Stock Should Be On Your Watch List For the Right Price 

What is the right price? That’s a question only you can decide. Although it seems like the company had few options, I’m not a huge fan of the price drop on its entry-level bike. Once you’ve devalued your product in the eyes of customers it’s hard to raise it back up.  

Therefore, it won’t shock me if PTON stock tested its May lows. The supply chain news continues to get worse and the company won’t have any earnings to announce until November. 

Still, this wouldn’t be the first time the stock was oversold this year. The legal news and price reduction were largely baked into the price. And analysts continue to give the stock a hefty increase from its current price.  

But if you’re not sitting on a loss, I might look for an opportunity to buy into PTON stock if the price drops another 10 to 20%. That would reflect what the real opportunity for the stock may be.