Peloton's stock has rallied too much to justify buying any more, analyst says

By Tomi Kilgore

While short interest in Peloton's stock was relatively high, Thursday's record rally wasn't about short coverings, S3 says

Shares of Peloton Interactive Inc. followed a record rally with another gain on Friday, but one J.P. Morgan analyst recommended investors stop buying because although quarterly results were encouraging, the outlook remains too uncertain.

And while bearish bets on the stock have been relatively high heading into earnings, S3 Partners said Thursday's big rally wasn't a result of bears covering those bets.

Analyst Doug Anmuth lowered his rating on the connected-fitness company's stock (PTON) to neutral from overweight. Anmuth also cut his price target to $5 from $7.

The downgrade comes a day after Peloton reported fiscal fourth-quarter results and the stock rocketed 35.4%, which was the biggest one-day gain since it went public in September 2019.

And despite the downgrade, the stock ran up 6.4% to $4.84, the highest close since Jan. 31. The stock has rocketed a record 50.8% this week, surpassing the previous record of 41% seen during the week ended Feb. 11, 2022.

Anmuth said he was "encouraged" by Peloton's cost-cutting and recent debt-refinancing, which has helped improve the company's "bottom-line" results, but noted that the fiscal 2025 revenue outlook was below expectations as new user growth decelerates.

While the reported quarterly losses per share were the narrowest in 13 quarters, according to FactSet data, the company hasn't reported a profit since the fiscal second quarter of 2021.

Anmuth said a return to growth in connected-fitness subscriptions and revenue remains "challenging," and "visibility is limited," as the company's outlook factors in declines in hardware sales, a pullback in advertising, higher monthly churn in subscriptions and a continued challenging economic outlook.

Meanwhile, if there is a silver lining for investors, it's that Anmuth was one of the few bulls left on Wall Street, so there's a pretty low bar for the company to clear in terms of expectations.

Of the 20 analysts surveyed by FactSet who cover Peloton's stock, there's only one unnamed analyst left who is bullish. There are three bears, and 16 analysts are neutral.

Meanwhile, short interest, or the number of shares that investors have bet on that prices will fall, is hovering around the highest levels seen since just before the start of the COVID-19 pandemic.

Based on the most recent exchange data, short interest as a percent of the float, or shares available to the public, was at 22.1%.

That compares with the current percentages of the original "meme" stocks of AMC Entertainment Holdings Inc. (AMC), at 14.4%, and of GameStop Corp. (GME), at 9.8%.

S3 Partners said some shorts have been covered recently, as but not enough to take any credit for Thursday's rally.

Over the last week, S3 said it's seen 1.6 million shorted shares get covered, worth about $7.1 million, while trading volume in Peloton's stock on Thursday was 135.5 million shares.

Basically, "the amount of short covering did not appreciably affect [Peloton's] stock price, it was buy-side pressure which moved [Peloton's] stock price, not short covering," S3 said.

"This does not mean that [Peloton] is not a squeezable stock, it just means that there has not been an appreciable amount of short covering...yet," S3 added.

Despite the recent rally, Peloton's stock has still tumbled 21.6% year to date, while the S&P 500 index SPX has rallied 17.4%.

-Tomi Kilgore

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08-23-24 1647ET

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