David Einhorn believes Peloton Interactive Inc. (NASDAQ:PTON) at its current level is “significantly underestimated”.
Greenlight Capital, the hedge fund that he founded in 1997, even bought 6.8 millions shares in the company connected Fitness to show their sentiments in August.
At this point, however, I am not convinced that Peloton is the stock I want to buy.
Why? This exercise equipment manufacturer continues to face a number of problems.
Why I am cautious about Peloton Stock
Since mid-August, when Peloton released its latest earnings report, the stock price has doubled.
Although the Nasdaq listed firm’s financial report was better than Street expectations, I still would give it a “B+” grade at most.
The positive EBITDA figures and the free cash flow, which investors were so excited about, are non-GAAP numbers.
As a result, I am cautious about what it means for PTON over the long term.
Peloton’s stock has surged in the last few weeks, partly because of its success in refinancing upcoming debt.
It had to increase its interest rates on debt from the extremely low rate to up to 5.5% in order to improve its financial position.
In the long-term however, a higher interest rate will lead to higher costs.
How would refinancing affect the PTON stock price over the course of time?
Peloton Shares may have already baked in good news
Peloton Interactive, which recently inked a contract with Costco, tapped into cost-cutting measures to reduce its loss per share from last year’s 68 cents to only 8 cents.
There’s a limit to how much you can reduce costs in order to achieve long-term benefits.
The exercise equipment manufacturer is being led by an acting CEO.
There is uncertainty about the future direction of its business.
It’s possible that new management will invest to boost subscriber growth, which was 1.0% lower in Q4.
It would also increase the spending.
The stock of Peloton has more than doubled in price since August.
This makes me question if the stock price of this fitness connected company already includes a large portion of good news.
The Street’s low price target for PTON is currently $2.0, which warns that the stock could fall by 65% from this point.
Overall, Peloton is only suitable for those investors who have a high risk appetite.
The post David Einhorn says Peloton is undervalued – here’s why I still don’t buy may change as new developments unfold.
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