Connected-fitness business Peloton Interactive (PTON 4.39%) may be my favorite stock that I still don't own. It's been painful watching it deliver market-crushing gains over the past year. But it raises the question: If I'm so impressed with this company, then why isn't it in my portfolio?
I don't care who you are or how long you've been investing, we can all fall victim to bad thinking and bad decisions. That includes me. Here are three reasons I still haven't bought Peloton stock. I'm not saying they're all good reasons; in fact, only one reason is valid. But here's hoping that you (or should I say "we") can learn from my mistakes.
1. First, I blindly dismissed it.
I wasn't familiar with Peloton before its initial public offering (IPO) in September 2019. But when it first crossed my radar, I immediately dismissed it. It looked like just another home-exercise equipment company, and we all know that someone with unused exercise equipment just lying around. People might buy while the fad is hot, but all fads quickly come to an end, and I was certain that would be Peloton's fate.
Had I actually researched Peloton instead of blindly dismissing it, I would have seen a completely different picture. Each stationary bike or treadmill from the company needs a pricey monthly subscription to take advantage of all the features. You'd think the high cost of ownership would deter people from this brand, but the opposite is true.
In its registration documents to go public, management said that 92% of all Peloton hardware ever sold still had an active subscription attached. And as of the second quarter of fiscal 2021, its 12-month retention rate was also 92%. It appears that the high cost of Peloton, in fact, creates a greater commitment to actually use the product instead of just letting it collect dust.
Therefore, Peloton is not only growing fast, it's also clearly building a loyal user base. And that user base gives the company a predictable high-margin revenue stream long after its one-time hardware sale. This subscription model is what truly makes this story more than just another fad exercise trend.
2. Then, I price-anchored.
Once I had my eyes opened to Peloton's superior business model, the price had already roughly doubled. And that's when I made my second mistake: I price-anchored. If we first notice a stock at $20 per share, our brains become subconsciously biased toward that "normal" price. If it goes down, we feel like it's a bargain. If it goes up, we feel like it's too high.
Around $40 per share, I was interested in buying Peloton stock, if only it would come back to more "reasonable" levels. The problem with price-anchoring is that we don't realize we're doing it. We justify our actions by saying more-noble things. We're not anchoring; we're being "disciplined."
Playing into my desire for a lower price per share was my misconception that Peloton was only surging because of the COVID-19 pandemic. Gyms were closed and people were stuck at home, creating outsize (and perhaps unsustainable) demand for Peloton's products. But this concern was irrational yet again. Consider that revenue was already roughly doubling annually prior to the pandemic. And for fiscal 2021, revenue is expected to more than double from a stellar 2020. This is clearly the continuation of Peloton's long-term trend, not a temporary boom.
Price-anchoring with growth stocks like Peloton is particularly dangerous. When financial results are compounding this fast, it can justify lofty valuations in a hurry.
3. Now, my cash is limited.
As embarrassed as I am with my mistakes, I share them for two reasons. First, by publicly acknowledging what I got wrong, I hope to continue my lifelong journey of continuous improvement. Second, I hope others can learn from my mistakes without making them on their own.
With thousands of stocks on the market, you can't research them all. But is there a company you're blindly dismissing? It might be worth digging deeper.
Moreover, is there a company you know well and love, but you're just waiting for a cheaper price? Beware of price-anchoring.
I still don't own Peloton stock today, because my personal portfolio is low on cash. Although I've missed out on Peloton so far, I never stopped buying other stocks. It's my opinion that there's always a worthy buying opportunity regardless of market conditions. Therefore, I'm always nibbling on new positions and adding to my winners. It's a strategy that's been very rewarding so far.
Maybe Peloton isn't the stock for you, but don't let fear sideline you entirely. Find top companies, buy stock, and hold for the long haul.