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Why Is Citron's Andrew Left Betting Against Peloton?

2019 has been an excellent year for tech boom skeptics. If, like me, you have spent the last several years shaking your head at the sky-high valuations of companies like Uber (NYSE:UBER), Lyft (NASDAQ:LYFT) and WeWork, then you probably felt a certain amount of satisfaction when the market finally started valuing these businesses with a modicum of sense.

In this context, the debate around luxury fitness bike manufacturer Peloton (NASDAQ:PTON) seems a little dated. The sheen has come off of tech-adjacent companies over the last year, which makes one question how long the business can sustain an $8.8 billion enterprise value. Activist shortseller Andrew Left's Citron Research recently published a note explaining why he thinks the company is radically overvalued.


Too high a price for too little

Left's price target for Peloton is $5 a share. Currently, the stock is trading at $30 a share, so this is an extremely bearish call. Peloton has been compared to GoPro (NASDAQ:GPRO), whose action cameras were all the rage a few years ago. At one point, that stock was trading as high as $87 per share - now it trades near $4 a share. It was a consumer fad that was over as quickly as it started, and investors who bought the hype lived to rue the day.

The investor believes that Peloton is destined for a similar fate. At an enterprise value of $8.8 billion and just 600,000 subscribers, the company's enterprise value-to-subscriber ratio comes in at $15,631, which outstrips its peer average of $655 by a whopping 2286%. For comparison, Netflix (NASDAQ:NFLX) has an enterprise value-to-subscriber ratio of $895, and Facebook's (NASDAQ:FB) is $217.

A replaceable product

Peloton had the benefit of being a first mover by creating a product that genuinely had a lot of popular appeal. As I have written previously, however, the origin of most speculative manias can be traced back to a new product or development that led investors to believe it was so good that no price could be too high. This seems to be happening with Peloton.

There are already numerous, more affordable alternatives to its $2,300 exercise bike - for instance, the ProForm Studio Bike Pro is available for less than $1,000. The Citron note also goes on to say that "second movers" have an advantage over Peloton as they are able to introduce new hardware features that Peloton users want - swivelling screens, open platforms (allowing users to watch television or Netflix), etc. By contrast, Peloton's hardware has remained essentially unchanged since 2014.

The numbers don't add up

What's worse, Peloton offers a $12.99 per month digital app subscription service that can be used with any exercise bike. By comparison, the monthly subscription for the integrated service on a Peloton bike is $39 per month. The company justifies this strategy by saying the app is lead-generative; however, less than 10% of its users end up being upsold. Who would pay $2,300 plus $39 a month for an experience that can be replicated with a $500 exercise bike and a $12.99 a month subscription?

Verdict

Citron's other concerns include potential legal problems that management may run into as a result of its misleading statements concerning the company's profitability, as well as a $300 million lawsuit from music publishers. Peloton's lockup period ends in March 2020 - it appears that management wants to keep the share price as high as possible until they are able to cash out. I expect there to be heavy selling when that happens.

Disclosure: The author owns no stocks mentioned.

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This article first appeared on GuruFocus.