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Peloton (PTON) Is The Latest Skid Mark In 2019's IPO Bonanza

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Another disappointing IPO hit the markets with Peloton (PTON) shares spinning their wheels and going nowhere but down. PTON’s IPO’ed at $29 per share and broke down 11% to below $26 in its first 4 hours of trading. This appears to be par for the course as investors lose their appetite for unprofitable IPOs.

PTON’s offering was the second-worst debut of the year, following SmileDirectClub’s SDC IPO on September 12th, which experienced an almost 30% price drop on its first day of trading.

Peloton Issue

Peloton’s prospectus illustrates the company has been driving a strong topline but at escalating costs. The firm’s revenue has grown 4-fold over the past 2 years, but its losses have quadrupled in just one year.

The high customer acquisition costs have been weighing heavy on the company’s ability to profit. Luckily the firm has been able to secure a 95% retention rate and long-run reoccurring revenue from the subscription that comes with the products.

PTON is trading at a 7.8x P/S, which is not outrageous for a firm that has been doubling its topline, but investors are concerned about the sustainability of its growth.

Peloton’s business model is easily replicated, and it is already facing increasing competition with Equinox’s SoulCycle about to release their own at home bike and virtual classes. The business model isn’t proprietary, and I do not think that its current growth rate is maintainable.

Peloton’s opening day slump is just another example of an unprofitable, shaky business model getting what it deserves in the markets.

The 2019 IPO Landscape

This year’s IPOs market is redder than it has been in almost two decades as 76% of firms enter the market with a loss on their income statement. Investors’ attraction to money hemorrhaging companies is coming to an end as our economic cycle is ostensibly about to expire.

The distress started with Lyft’s (LYFT - Free Report) IPO back at the end of March. Investors were overzealous about the first ride-hailing firm hitting the public exchanges and drove the stock price up 10% on the first day of trading. This excitement quickly turned to panic, with the stock losing over 20% of its value in the first month and has lost almost 50% since its opening day close.

Uber UBER experienced a similar narrative, though investors were much more cautious when these shares started trading in May. UBER is down 24% since its first day of trading.

Both ride-hailing firms have business models that continue to lose an increasing amount of money. They lose money on almost every ride with the goal being to bleed out every other competitor with the lowest prices. This business model doesn’t drive up valuations with shareholders just hoping they aren’t holding a position in the losing firm.

Slack WORK is another example of an enterprise that is being overrun by competition. It is a collaborative platform with the goal of making email obsolete. Unfortunately, this model is easily replicated and has been by Microsoft Teams MSFT, which is already brought in more daily active users in 2 years than Slack has been able to in 6. WORK has lost over 40% of its value since its offering in June.

WeWork was planning on going public this month but had to delay its IPO indefinitely as the shares saw a lack of interest in the public market. WeWork is a real estate company trying to sell itself as a tech company. Its business model is a commercial real estate firm at best and a Ponzi scheme at worst. Its last round of funding valued the company at $47 billion, and today analysts are saying the company value is closer to $10 billion.

Founder and CEO Adam Neumann was ousted this week following the failed IPO.

Endeavor Group pulled its offering off the table yesterday after seeing the IPO market’s disappointing performance with PTON’s first-day skid being the final straw.

2019 IPOs weren’t all disasters with successes being seen by Pinterest PINS, Zoom ZM, and Beyond Meat BYND. I will discuss these successes in a subsequent article.

Take Away

The 2019 IPO bonanza was underlined by red on the income statement and disappointed investors. The fact that investors and traders are so skeptical of these unprofitable companies with shaky business models is a good sign for our markets. It further demonstrates that overzealous investors aren’t creating a valuation bubble as we saw in the dotcom bubble that burst in the early 2000s.

These firms that have seen valuation slashes aren’t failing, but investors are just more cautious with riskier investments. Keep an eye on these firms future announcements and earnings releases as the time to buy may be around the corner. If these stocks begin to show a clear path to profitability, expect to see valuations to rally.


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