Peloton (NASDAQ:PTON) is growing leaps and bounds. Therefore the successful strategy for PTON stock has been to buy the dips. Spoiler alert, the 35% dip this year remains an opportunity to get long. Shying away from it now means missing out on a strong stock in a bullish market.
In spite of the negative rhetoric, the bull is still in charge on Wall Street. The bears are not able to sustain any pressure for more than a few hours. Even when they did a lot of damage on March 5, they still lost. The indices, except for the Nasdaq, went on to make new highs. If the markets are higher in the future then so is Peloton stock.
The company’s products are so successful that they can’t keep them in stock. This is in spite of being very pricey. They are not for me but luckily there are enough fans that demand is extremely healthy. They had help from the pandemic of 2020. It disrupted global gym routines, but for a few like this and Zoom (NASDAQ:ZM) these problems were gifts. Peloton was lucky to be in the right spot at the right time.
PTON Stock Has a Tailwind
The company was already doing good work, and the lock down just launched it into the stratosphere. PTON stock soared to $170 per share. Unfortunately, it is almost 40% below that mark now.
But therein lies the opportunity to get long it again. I shared a similar note on Dec. 8 and it delivered great results.
For the short term, the price action is stuck in a range. The breach of either limits should carry momentum in that direction. This is to say that this is an opportunity for the bulls but also one for the bears. PTON stock recently rebounded hard off $90 per share. The sell-off was mostly due to a harsh market-wide debacle. Even mighty stocks like Tesla (NASDAQ:TSLA) collapsed. This was not a stock specific problem to Peloton.
It is imperative that the buyers don’t let it set a lower low. It would be better if they hold $100 so not to come close to the March 5 lows. The reason this is important is so that the buyers chip away at the resistances above. Specifically, the bulls want to breakout from $120 per share. Doing so could trigger another $20 rally from there.
So far, 2021 has not been good to Peloton stock but the support is there to change that. Normally these areas provide a good base for another run at the highs. For those who stayed long the stock from the highs, it’s too late to panic now. On the other hand, this level makes for a respectable entry point at least for the mid-term.
Since the markets are still near all-time highs, it makes sense to take partial positions first. Leaving room to manage risk is always a smart thing to do. The options markets can also provide great opportunities for stocks like these. Instead of buying shares with no buffer, I can sell the April $100 put. For this I collect more almost $4, so I don’t even need a rally to win. In fact, PTON can fall more than 10% without causing me losses. The break even point is $96 per share.
The Proof Is in the Pudding
The fundamentals carry a lot of promise. Peloton is growing its revenues extremely fast. In 2017 they were barely $220 million. They are currently nearly $3 billion a year. Critics point out that its price-to-earnings ratio is $230. That is extremely high but so what? Its price-to-sales ratio is under 13, which is in line with a lot of the mega-cap stocks. Tesla, for absolute comparisons, is twice that. Delivering growth costs money.
Investors who insist on it being more profitable should not venture into growth companies. It’s wrong to gauge different types of companies with the same metrics. This is not a mature company so management is not focusing on profits yet. Aggressively growing requires heavy expenses at first.
In summary, the bulls are in charge of the overall market. Therefore, dips are buying opportunities. PTON stock has had it’s fair share of falling and the tide could turn soon. Just for the record, I am equally as realistic about not chasing rallies that have gone too long.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.