Here’s why analysts think Peloton is overvalued

Yahoo Finance’s Brian Sozzi breaks down how Peloton is faring so far in 2021 and weighs in on what the future of the fitness industry looks like post-pandemic.

Video transcript

- By now it's become a frequent refrain that there is frothiness in the markets here. The folks over at Goldman Sachs are now tackling that very issue. And Brian, you in turn tackled the note they wrote about it. So what's your big takeaway here?

BRIAN SOZZI: Yeah, in terms of the Goldman Sachs frothiness, they highlighted 39 stocks that are trading above what they call a 20 times enterprise value ratio, which historically has not been good when a stock trades over that and you don't have a lot of earnings or sales. But the stock actually tends to underperform, I believe by, it falls about 1% compared to a 6% gain for the S&P 500.

But the reality is this. You have a lot of stocks trading at well above historical valuations, and it's gonna come a point, probably very soon, when you get these earnings reports, whether these valuations are justified, miles.

- I mean, yeah, sure. Like, I think-- I think what's interesting about these kinds of reports, and I think what's very challenging right now for all of Wall Street and all of financial media to discuss what's happening in the market is that the financial media and Wall Street is extremely fundamentals-biased, that the only thing that could possibly matter ever in a particular stock is fundamentals, and no one likes to admit that it's a bunch of people on Reddit pushing around names, pushing GameStop to a 15-year high. But, you know, that is what's happening.

And so I think what's gonna be interesting to kind of see over time is how and when and at what pace and, you know, what this-- how these valuations come back, I suppose, to where Goldman thinks some of these names ought to trade because, you know, as Bill Smead was saying before, these kinds of cycles come and go in markets. They are a natural part of markets, which involve, you know, human participants that tend to mess up in the same ways over time. And so I think it's a very interesting moment.

It just-- it feels to me it's so similar to 2018, and I know that the short vol was the trade there, and here it's buying everything that's been shorted-- short-squeezed is really the trade here. But I don't really know how this is going to end, but it'll certainly-- it seems like it's going to change abruptly whenever it does. But notably, it's not really a broad market action. It's sort of what we're seeing in individual pockets.

- Well, and what's interesting too, Miles, is that you have sort of two classes of high fliers here. You have the ones that don't seem to make any sense, like Gamestop, or make tenuous sense, right? And then you have those that just appear maybe overvalued, that there are still is this sort of fundamental case. Maybe it's just gotten a little ahead of its skis and it's too expensive. And maybe Peloton is an example of one that falls into that category, Brian.

BRIAN SOZZI: Right, Julie, I'll have the hashtag #longread hitting on Peloton on the Yahoo Finance site very shortly. But I've spent the past few days chatting with the Wall Street community that remains, by and large, extremely bullish on Peloton. In fact, about 90% of the sell side analysts on Wall Street that cover Peloton in fact rate the stock a buy. So there's a lot of optimism, and I get it. It was a big 2020 for this company, in many respects a landmark year. They saved waistlines in America, really, for many people.

Now, where you are-- I am hearing a little-- there's murmurs, you know, when I talk to these analysts, you know, off the record, hey, Brian, we're gonna get started about the valuation on Peloton-- not enough yet to justify a downgrade, but getting concerned. The stock trade's about 333 times forward earnings. That's eight times the average priced earnings multiple on the big five FAANG stocks, which, as we all know, more a greater history, more predictable revenue streams, and just a heck of a lot bigger than Peloton.

And the analyst community points to some of these concerns that they're all watching right now on Peloton. Bike supply shortages is nothing new. We've been watching. Yahoo Finance have been reporting on this since November. But the fact is there's no indications yet that Peloton has got its supply issues in the bike-- they haven't gotten that addressed. They're having problems, I think, or from what I've heard, getting the bikes off of boats due to COVID-19 restrictions, and flat-out simply making enough bikes to meet the crush of demand.

Another concern that the analyst community is watching-- and I think this is more a 12- to 18-month concern-- it is rising competition and a lot of well-funded competitors now in the market. Lululemon bought Mirror for $500 million. They're going to expand that. Tonal is coming off a capital raise. They will look to improve their manufacturing. You have Apple. Apple Fitness just launched. Now, I don't think the content is where Apple wants it to be to be a real competitor of Peloton, but it's Apple. They have an installed base with iPhones and Apple Watch, so it's something to watch.

And then last but not least, gym reopenings-- I think a lot of folks are concerned on the street what happens to Pelton's engagement when gyms start to, I think, more-- just reopen more in the second half of this year as we get the vaccine? Does that engagement go down? And that wouldn't be good for Peloton, because this is stock price perfection, not this quarter, not next quarter, really, for the next quarter and every single quarter for the next five years.

- Yeah, and I'll come back to the same question that I always ask about Peloton or any other of these fitness brands, which is what has been the sort of longest-running fitness brand that we can think of? There aren't too many that have really had long-term sustainability. I mean, I don't know if you guys remember Jazzercise, but I don't think anybody is doing it.

BRIAN SOZZI: I did it this morning. Yeah.

- Oh, well, there you go. You're the one.