In this segment of "The Morning Show" on Motley Fool Live, recorded on Dec. 13, Fool Director of Small Cap Research Bill Mann and Senior Analyst Jim Gillies explore why it may be time to invest in Peloton (PTON -1.43%) again.
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Bill Mann: I think Peloton is really cheap here and I understand that they have an inventory issue at this point, but this is the first time I've been able to say this about well, second Pinterest (PINS 2.06%), about a hot 2020 stock.
Jim Gillies: I'll say what I said to Cena, our Minister of Culture, have we decided, have we settled on the title yet?
Mann: He moves around. He's wily like that.
Gillies: Exactly. Okay, I said to Cena in a private I think it was a Twitter (TWTR) conversation or whatever. But the day that it got waffled down, what was it 30%? The most recent quarter where it was bad, and I said to Cena, I said so basically you don't have to rush to jump into companies that get slammed because all the finance literature, inertia is a thing so the stock gets slammed and then it drifts down for the next quarter or two and it works in reverse.
If the stock rockets on fantastic earnings, it tends to have a bit of a halo effect and kind of drags itself up over the next few weeks or months as well. So I said when Peloton was down to about $50 to $55 on the day it sold off, I said there's no reason to rush in.
The fundamentals are bad enough at this point in time, mainly looking at that balance sheet, maybe looking at the fact that they burned $1.2 billion, I think in two quarters, and I said they've only got $1 billion on the balance sheet and they've got $800 million in debt.
So they're probably going to raise capital and then of course they did about three weeks later. This is a company that is having some severe immediate-term issues. If immediate-term issues do not turn into long-term issues then I agree with you, Bill.
Mann: Let me just read this. There's a tweet by a really, really smart and really, really anonymous investor named "post market."
Mann: Let me just read through this and this is terrible like people are going to have to get their abacuses out to try to figure 330 million shares at $38.50 is $12.7 billion, plus $850 million in a convert, and less $1.5 billion in cash that gives them about $12 billion enterprise value. Sound OK?
Gillies: Sounds about right.
Mann: Year-end, 3.4 million connected subs at $480 per year is $1.6 billion, 1 million digital subs at $200 bucks a year, $200 million, so that's $1.8 billion in recurring subs, you divide $12 billion by that and that's about $6.7 [billion] 2022 estimate.
Gillies: Off just the sub revenue, no hardware?
Mann: Just the sub revenue.
Gillies: I saw the same tweet. I'm like, OK, that's interesting. What direction of the subscribers is going in and that's the question.
Mann: This is the big question. There was somebody else in that thread and I'm not going to sit here and read a Twitter thread because that's both droll and dumb [LAUGHTER] but made an anecdata point that it was his finding or his experience that a lot of people who had Peloton subscriptions through the pandemic now have gym subscriptions again and in his case he was like, I'm using the Peloton more now that I can go to the gym as well.
Gillies: I saw that yeah.
Mann: That it becomes something that is additive to a gym membership and not in competition.