Fool me once, shame on you. Fool me twice, shame on me. Fool me for the tenth time in the IPO market, and call me a retail investor.
Peloton Interactive (PTON) hit the markets for opening trades on Thursday. I spent the morning watching the bid-ask line up.
Initially, the stock indicated $31. I'll admit I was surprised to see some strength, but the company has been all over the press, and without all the negatives of WeWork, so I guess some hungry IPO money still exists. Plus, Peloton has a loyal, almost cult-like, user base from which it asked they buy shares to show their support in the company. Some of those folks could be lining up.
Then, the bids ticked lower. $29. $27. I saw it hit $24 at one point before marching higher again. I've rarely seen this much volatility simply trying to match a price to open a stock. Not only should we expect volatility with Thursday's trading, but for days to come. I think we'll see a cult love/hate quickly established on Peloton.
I watched the CEO on CNBC this morning, and I can't say I was overly impressed. Still, I know many users of Peloton, and for the most part, they love it and swear by it. With a valuation coming to market around $8 billion and the company raising $1 billion, the current losses aren't going to eat up that cash any time soon.
There is a strange dichotomy, though, in its revenue and margins. Peloton hardware sales make up the lion's share of revenue. I was shocked to see the strong margins the company garnered on hardware sales. It's virtually even with their software sales. And that's the head-scratcher.
Do we care more about stronger-than-expected margins on hardware or weaker-than-expected margins on software/subscription? Given how the company is focused on creating a subscriber base, growing aggressively, and touting it interaction, that lends itself more toward subscriptions for the future, so seeing smaller-than-expected margins is a concern for me.
Also, the CEO said the company is recession-proof. Stationary bikes in the $2,500+ range along with treadmills starting at $4,500+, and both carrying a monthly subscription fee are absolutely recession-proof. Insert eye-roll now.
The CEO passed it off by breaking it down to a monthly cost or monthly financing. You know who else sells like that? Car sales employees. When a CEO comes across sounding like, "I do whatever it takes to get you onto this bike, today!" then I have concerns about leadership.
I do believe Peloton is more than a short-term fad, but I don't think it is a long-term phenomenon. That translates to some potential for the stock over the next year or two as long as the shares can avoid the early weakness other recent IPOs have suffered.
As you can likely tell from the tone of this piece, I'm not sold on Peloton. If this closes under $25 Thursday, bulls could be in for a world of hurt. I would also tag this one for lock-up expiration. The potential disappointment lining up for day one of trading will weigh on insiders already "counting" their money from a first-day pop that never happened.