Buy the Bike, Sell the Stock
“GYM CLOSED DUE TO COVID-19.”
When I saw those signs, I knew Peloton was a clear winner.
The company sold a nearly $2,000 stationary bike — and that was just the start.
It also required a $40-per-month subscription service. It allows subscribers to participate in classes by streaming.
Cardio addicts who couldn’t get their fix at the gym bought Pelotons by the truckload.
At the end of 2020’s first quarter, Peloton had 500,000 subscribers. And by the end of the year, its subscriber count doubled to 1.1 million.
This company was well on the way to being one of the big winners of the pandemic. It wasn’t too hard to see why.
It was selling a product that consumers had to have and tacking on an essential monthly subscription to generate recurring revenue. And with gyms closed without any reopening date in sight, there was no competition.
It doesn’t get better than that.
My brother-in-law even bought two, for both his summer and winter homes.
A few months into the shutdown, my wife and I were in our den binge-watching The Office. My iPhone buzzed. And it was my brother-in-law.
With the excitement of someone who just won the lottery, he gushed: “Charles, I know you do this for a living, but I’m telling you … buy Peloton’s stock!”
I told him I’d look into it. After the call, my wife asked: “Are you buying the stock?”
My reply: “Not a snowball’s chance in hell.”
Before she could get upset with me for not listening to her brother I told her why…
Sir Isaac Newton
Peloton was a great business, but a terrible stock.
As far as the business went, it was on fire. Peloton’s subscriber base was booming and continuing to rise. Over the past two years, it’s grown its subscriber base by 5X.
And in 2020, its stock soared as much as 430%.
But investors were paying a very high price for a near-perfect future.
That was especially the case in the early part of this year. The stock price was totally out of whack with the worth of the business.
In other words, the stock price was outpacing the underlying worth of the business. I’ve seen that movie before and it doesn’t end well.
Because at the end of the day, the stock price always follows the fundamentals of the business. And as sure as the day is long, the stock price starts to fall.
And that’s exactly what happened in 2021. Peloton’s stock plunged more than 75% from its highs.
I saw the same thing play out with other pandemic darlings. Zoom is down about 67%. And Zillow has seen about a 70% decline, too.
And now, investors are left scratching their heads in frustration, trying to figure out what the heck has happened.
It all comes down to gravity…
Trees don’t grow to the sky, and stock prices don’t rise to infinity. At the end of the day, the laws of gravity haven’t been repealed.
No matter how great the business, you never want to buy it at any price.
Ben Graham — Warren Buffett’s mentor and teacher — put it best:
The really dreadful losses always occur after the buyer forgot to ask, “How much?”
Because a stock is simply a piece of a business. And over the long term, a stock price will follow the growth of the business.
If the stock price happens to race ahead of the growth, it will eventually come back into line — like Peloton’s is now.
Being right on the business and wrong on the stock happens more times than one might think.
It happened during the dot-com bubble, and it’s happening again in the pandemic “work from home” era now.
At all times, I keep a lot of companies on my watch list. I’d love to buy them all, but only when they trade at attractive prices. So, I always remind myself to ask: “How much?”
When pullbacks happen and others panic, I see opportunity. There’s nothing I like better than buying stocks when they’re on sale.
In fact, one company has been on my watch list for two years. And it only just started trading at an attractive price.
Tomorrow, I’m adding it to our Alpha Investor portfolio. So, Alpha Investors, stay tuned!
And if you’re not an Alpha Investor yet, be sure to check out how to join us so you can access this new recommendation, too.
Founder, Alpha Investor