Nothing Goes 'to the Moon' Forever

Nothing goes 'to the moon' forever... A classic example from the era of soaring garbage... Becoming just another stock here on Earth... No, this cyclical industry isn't mining or biotech... Perception is different from reality... What a company's share price really shows... Equity investing done right is a long-term proposition... An educated guess on the next market darling to crash back to Earth...

Even the most manic bull markets can't send all stocks 'to the moon' forever...

For those of you who don't know, "to the moon" has become a rallying cry of the "meme stock" crowd... It's exactly as it sounds – the idea of a stock going so high that it practically touches the American flag that the Apollo 11 astronauts put on the lunar surface in 1969.

One stock in particular appeared to get very close to the moon throughout much of last year... It soared an incredible 758% from its lowest closing price in March 2020 ($19.51 per share) through its peak closing price in January 2021 ($167.42 per share).

But it has been a much different story as the broad market rally continued this year...

Since its January peak, this stock has plummeted roughly 70%. It's trading at about $50 per share today. Meanwhile, the S&P 500 Index is up 23% in that span... And after a brief hiccup in September, the benchmark index is hitting new all-time highs almost every day.

As I (Dan Ferris) will show you in today's Digest, this stock is a classic example of how investors can mistake a bad business for a good business during a speculative frenzy like the one we're currently living through... And if they buy at the wrong time, they can lose their shirts.

It hardly matters why this stock's share price plunged off the surface of the moon starting back in January. The real mystery is why it ever soared out of sight in the first place...

In case you haven't guessed yet, I'm talking about Peloton Interactive (PTON)...

The exercise-equipment company soared during the COVID-19 pandemic... Unable to go to the nearest gym, folks bought its bikes and treadmills in droves so they could work out in their dens or basements.

Today, Peloton offers exercise bikes starting at $1,495 and $2,495, as well as treadmill packages ranging between $2,495 and roughly $3,000. One of the favored features among users is the ability to take part in workouts broadcast live from the company's New York City studio.

Although a niche group of devotees loves the business, a catastrophic flaw remains for investors...

Despite Peloton's sales more than doubling in the fiscal year that ended in June, compared with the prior year... the company has been unable to transition to consistent profitability. Of course, profitability has become a rather quaint measure of corporate performance in the era of soaring garbage... but I promise it matters.

Peloton's market value peaked in January at $49 billion... That's more than 20 times the company's sales, according to data compiled by Bloomberg. Today, the market cap is around $15 billion – a little more than 3.5 times sales.

The following chart tells the tale of the shares' bubbly rocket ride up, their painful trip back down into the Earth's atmosphere, and the recent plunge into the ocean after the company's disappointing quarterly earnings report. Take a look...

The Wall Street Journal summed up the company's biggest problem last Thursday...

Peloton Interactive is slowing down. The maker of connected fitness equipment on Thursday reported its smallest quarterly gain in subscriber growth since it became a public company two years ago, and said that fewer people are joining its online workouts.

This former market darling appears to have peaked. Its best days seem to be clearly in the rearview mirror. And the whole saga brings to mind an interesting point...

All hypergrowth stories fall short of moving to the moon forever. At some point, the growth that investors fall in love with fades... And they become just another stock here on Earth.

Regular readers know I've been a Peloton skeptic since shortly before it became a public company...

The business went public on September 26, 2019. A few weeks before that, I commented on the impending initial public offering ("IPO") in my September 3, 2019 Digest...

Remember the gross-out TV show Fear Factor, where guests were challenged to do crazy things like climb into a box full of snakes or eat live, giant cockroaches?

That's where we are now in the market: It's the "Fear Factor IPO" market, where investors have to buy into crazy new stocks. Those who require profits are labeled cowards.

Exercise-equipment maker Peloton smells like a typical Fear Factor IPO.

Later in that Digest, I concluded...

Peloton strikes me as the Tesla (TSLA) of exercise equipment: There's more cachet than genuine benefit to owning one. And yet, I bet showing off your stationary bike won't feel nearly as good as flashing a Rolex, an Apple Watch, a Tiffany bracelet, or a fancy electric car.

To hear Peloton tell it, it's not the Tesla of exercise equipment. It's the Amazon (AMZN), Apple (AAPL), FedEx (FDX), Facebook (FB), and much more... I'm not kidding. Its IPO contains the following slide...

I think people in the psychology world call this multiple personality disorder or something like that. Anyway, they treat it like a disease.

Peloton tried to tell the world it was something other than just another company in a competitive industry. But in the end, a company is what it does... And Peloton sells exercise equipment.

The story Peloton tried to tell investors about itself didn't change the nature of the exercise-equipment industry...

A good equity analyst will tell you that it's a cyclical industry. I'd be more blunt and tell you that it's fad-driven... And because of that, I'm skeptical that any exercise-equipment company will ever become a consistently great business.

Take Nautilus (NLS), for example...

The company owns multiple well-known brands, including Bowflex and Universal Gym Equipment. Founded in 1986, it went public in 1999. And as you can see, the following chart tells the tale of extreme ups and downs in the company's stock over the past 22 years...

Like Peloton, Nautilus failed to take up permanent residence on the moon two decades ago... It soared to roughly $40 per share during the dot-com era, then crashed as low as roughly $0.60 per share in the wake of the last financial crisis. That's a nearly 99% decline.

Overall, looking at the longer-term picture, you can see that the stock has pretty much gone sideways for 22 years. If I showed you this chart without naming the stock or industry, no one would blame you for saying it looked like a mining or biotech company.

If Peloton turns in a similar 99% freefall back to Earth in the months and years ahead – and the stock is well on its way already – it would bottom out at less than $3 per share.

The trouble for companies in Peloton's industry starts with the reason why folks buy exercise equipment...

It appears to make a difficult thing easier.

Humans have this idea stuck in their heads that spending a lot of money on exercise equipment is the same as getting serious about exercise...

When folks spend thousands of dollars on a Peloton bike or treadmill, it's a statement. They're essentially saying, "I'm willing to spend big if that's what it takes to get serious about my health."

The truth is a little different, though...

Any commitment to exercise is a commitment to work hard at least two to three times per week indefinitely. No amount of money will make that hard work any easier to do.

Instead, folks get excited... shell out the big bucks for the fancy piece of steel with Peloton on the side... and fail to follow through. The bike soon turns into an overpriced clothing rack... goes into the garage behind the dog food... and eventually gets sold for peanuts at a yard sale.

Before I continue, the keyboard cowboys can only write in and tell me I'm wrong about their wonderful Peloton bikes under one condition... They must agree to write in again in the (likely near) future when they sell it or realize they haven't used it in at least two months.

Now, as fad-driven as it is, continued success in the exercise-equipment industry is possible...

The problem is, it depends on a company's ability to consistently innovate and create popular new products that grab the attention of the masses.

Having already created its not-very-innovative "exercise bike hooked up to the Internet with a subscription to exercise videos" breakthrough, I don't believe it's highly likely that Peloton will soon create another. It's also highly unlikely that another pandemic will temporarily goose the company's sales into the stratosphere again any time soon.

And of course, even if that were to happen, Peloton probably still wouldn't become consistently profitable (i.e., a good business)... So in turn, its share price would probably just soar and then crash again.

Judging by its recent lousy quarterly results and the huge drop in its stock price, it looks like the consumer and the stock market are breaking up with Peloton.

Unfortunately, Peloton's business results have begun to disappoint before the company could reach consistent profitability... The company doesn't expect to be profitable again until 2023 – and if I were willing to make a guess, I would say that won't happen either.

I would also bet that Peloton will never become a consistently profitable, noncyclical consumer-goods company. Its industry just doesn't work that way.

Capitalism is brutal for companies like Peloton... No law of nature says a popular product is automatically a great business. Popular product or not, most new businesses don't make it. And no product can turn a brutally cyclical industry into a wonderful place for long-term investor capital.

I won't go on about why it was always a bad idea to expect Peloton to generate large amounts of real wealth for shareholders. I'm sure many people will fail to get the difference between a product they like and a business likely to treat long-term shareholders well.

What everybody clearly can see now, though, is that Peloton was just another exercise-equipment company that gave birth to a new exercise fad... soared... and then crashed.

The darkness of cislunar space is full of similar aborted trips to the moon.

Investors should consider the rise and fall of Peloton's share price in light of a point I made in Friday's Digest...

A company's share price is simply the current price of their future wealth.

The intrinsic value of all stocks, bonds, mortgages, and other securities is the same... It's the sum of all the cash flows an investor will receive over the life of the security or until they sell, whichever comes first. If you sell, the amount you receive is the residual value of all the cash flows yet to be generated for the next investor.

Either way, you can't escape the forward-looking nature of investing in any business.

Given its difficult industry and the odds against it being anything but another fad-driven exercise-equipment company, it was never likely that Peloton would create substantial amounts of shareholder wealth. If wealth is consistent net profits, the jury technically is still out on Peloton... But so far, it's not looking good.

Equity investing done right is a long-term proposition...

It's like what legendary investor Warren Buffett once said... It's not that hard to make money in the stock market as long as you're "not in a hurry."

The longer you own a great business, the more wealth it will generate for you. Own that great business for years and years, and you'll earn many times your investment.

It's not hard to learn the characteristics of the best long-term equity investments... But you still need to take the time to learn what they are. For the sake of today's discussion, we'll suffice to identify one thing great long-term equity investments mostly are not...

They are not companies in cyclical, fad-driven industries like exercise equipment.

Even large, noninvestment purchases work best as long-term propositions...

For example, in 2007, I bought a 2004 model car. And I still own it today, 14 years later.

I realized that the best way to get the most out of my money was to use the car for as long as possible.

The utility of a car is like the return on a stock or a bond... By spreading the cost of the car over the longest possible time frame, you get more utility per dollar paid up front. The longer you own it, it's as though you paid less and less for it in the first place. (Finance nerds, take note... I realize good long-term returns and depreciation are different, but they both effectively lower your cost basis over time. The effect of time is the common element.)

Likewise, the only way to get $2,495 worth of utility out of the higher-end Peloton bike is to keep it for many years and use it regularly. Secondary-market pricing is all over the map... but it seems like the going rate for a used one on eBay is somewhere around $1,000.

Everybody knows once you drive the car off the lot (or take delivery of your Peloton), the market price falls fast.

As long as you're buying for long-term usage, though, that's not a problem... The longer, the better.

Still, I can't help comparing what I believe will be the most likely outcome for Peloton bike owners with the outcome for Peloton equity buyers so far in 2021...

Both groups paid a premium price for a commitment whose outcome was somewhere between uncertain and probably not good.

Both groups likely started with unrealistically optimistic expectations that will not be met.

Both groups probably thought they were accelerating their progress and performance at the time of purchase – a highly dubious proposition.

And of course, buying the bike comes with a time commitment in addition to the substantial financial commitment. You don't own anything that doesn't also own you.

Skeptical as I am of those folks who own Peloton bikes and treadmills, I must admit...

It's certainly possible that plenty of these people will own their products for a long time and use them regularly enough not to regret the purchases. That doesn't help the company's bottom line, though.

My personal views on exercise equipment are definitely showing... But the only thing that matters for investors is what their prospects are when allocating money to that industry.

And of course, they're not good... They never have been especially good. Even a mediocre equity analyst could've told you all of that two years ago when Peloton went public.

I'd like to think I'm at least a little better than mediocre. But whether I am or not, I recommended avoiding both the bike and the stock in that September 2019 Digest.

We can debate about the bike, but the stock is a done deal... I said to avoid it before it soared and crashed.

Technically, you'd still be up right now if you bought in shortly after the IPO... But you're crazy if you think getting roundtripped out of a huge multibagger profit is anything to brag about.

Anybody who bought at the IPO and is still holding on is a lousy trader. Anybody who thought Peloton was a great long-term bet is a mediocre investor.

In that Digest, I also said Peloton probably wouldn't exist in five years...

I have three years left.

But if the Nautilus example is instructive, then Peloton likely will stay afloat for many more years... And maybe it will even become a great, beaten-down value stock trading for pennies one day, as Nautilus was at the depths of the financial crisis in early 2009.

I doubt I could pick the next company that will fail to change the difficult dynamics of its highly cyclical, competitive industry. But I could venture an educated guess...

I'm confident Tesla will become one of these failures in the next couple of years...

Founder Elon Musk convinced the faithful that Tesla is more than just another car company.

And in turn, its stock streaked straight up toward the moon... It soared to as high as about $1,230 per share last week. At that point, it was up a mindboggling 60% since October 1.

But the thing is, that's absolutely not the case with Tesla... It's not a software company. It's not a battery company. And it's not a renewable-energy company.

It's a car company. Plain and simple.

At its current market value, Tesla is worth more than the next 12 publicly traded car companies combined. It's worth more than four times Toyota Motor (TM), even though Toyota is consistently profitable and makes about 15 times as many cars per year as Tesla.

That's absurd.

Perhaps even Musk himself sees the utter absurdity in Tesla being valued at more than $1 trillion...

Over the weekend, Musk proposed selling 10% of his TSLA shares... If that's not zany enough, he plans to do so because 58% of more than 3.5 million votes on a Twitter poll that he created said he should.

And Musk isn't alone... Since Tesla surpassed the $1 trillion milestone in late October, other current and former board members have started cashing out as well. According to reports, these folks have sold hundreds of millions of dollars' worth of shares in that span.

As a result, we already might've seen the top in Tesla's stock. Look at how it's doing now...

Notice the rocket ship falling out of the sky over the past couple of days... Tesla's stock dropped almost 5% on Monday. And with panicked investors starting to question what's happening, it dropped another 12% today. Just like that, it's down to $1,025 per share.

Tesla's share price has been inflated due to the simple narrative that electric vehicles are the future...

The company's sales are in hypergrowth mode, mostly because it's a great brand with a first-mover advantage... And Musk is a controversial, outspoken CEO who garners plenty of extra attention.

But being a first mover in a low-margin, low-return, insanely competitive business like the car industry is not an advantage... It's a handicap. It means all the other companies in the space will benefit from all the mistakes you're making – and correct them as they grow competitive.

Look, I know that not everyone here at Stansberry Research agrees with me.

But as we've now learned with Peloton, you can't change the facts about what business you're in... No matter what stories investors are led to believe in the short term, it will always be just another exercise-equipment maker in a highly cyclical industry.

And in a similar vein, Tesla is just another car company. So just like the market has done with Peloton this year, I believe it eventually will bring Tesla back from lunar orbit.

We can't predict the future, though...

The pullback over the past couple of days could prove to be a false start. Perhaps Tesla's real plunge won't happen this year. And it might not even happen next year.

But at some point, just like Peloton, Tesla will come crashing all the way back to Earth.

In the end, Peloton and Tesla are examples at different stages of the same phenomenon...

Investors these days have lost touch with the basic reality that a stock is a share of a real business. And telling wonderful stories won't change the nature of the business they're in.

New 52-week highs (as of 11/8/21): Analog Devices (ADI), Best Buy (BBY), Cameco (CCJ), Richemont (CFRUY), CoreSite Realty (COR), Denison Mines (DNN), iShares MSCI Singapore Fund (EWS), Eagle Materials (EXP), Expedia (EXPE), Comfort Systems USA (FIX), Freehold Royalties (FRU.TO), Alphabet (GOOGL), Ingersoll Rand (IR), Martin Marietta Materials (MLM), Microsoft (MSFT), MYR Group (MYRG), Cloudflare (NET), Palo Alto Networks (PANW), Construction Partners (ROAD), ProShares Ultra Technology Fund (ROM), Rayonier (RYN), The Shyft Group (SHYF), First Trust Cloud Computing Fund (SKYY), ProShares Ultra S&P 500 Fund (SSO), Trex (TREX), United Rentals (URI), ProShares Ultra Semiconductors Fund (USD), ProShares Ultra Russell 2000 Fund (UWM), Vanguard S&P 500 Fund (VOO), and SPDR S&P Oil & Gas Exploration & Production Fund (XOP).

Not much is happening in our mailbag today. What's on your mind? As always, you can send your thoughts and comments on the markets to feedback@stansberryresearch.com.

Good investing,

Dan Ferris
Eagle Point, Oregon
November 9, 2021