Investing is Easy?

By Charlie Bilello

13 Sep 2020

Peloton reported earnings this week and in after hours trading its market cap moved above $26 billion, nearly as high as Ford. A year ago Peloton went public with a market cap of $7 billion.

Created in YCharts

After posting this chart on twitter, the responses can be summarized as follows: “Ad hominen insult. Ford is going to 0. Peloton going to the moon. Buy Peloton. Short Ford. Investing is so easy.”

In the midst of a mania, this is indeed the prevailing view, but is investing really that easy? Let’s take a closer look.

Peloton reported revenues of $607 million in the second quarter of 2020, a stunning 172% increase from a year ago ($223 million). Over the last 12 months, their total revenue was $1.8 billion.

Meanwhile, Ford reported revenues of $19.4 billion in the second quarter of 2020, a 50% decrease from a year ago ($38.9 billion). Over the last 12 months, their total revenue was $130.4 billion.

How does a company with revenues of $1.8 billion have nearly the same market cap as a company with revenues of $130.4 billion?


Peloton investors are expecting its rapid growth to continue, while Ford investors are expecting the opposite.

The result?

A substantial difference in valuation.

After reporting earnings, Peloton traded at 15x sales versus 0.2x sales for Ford.

Now this is where investing in practice becomes a more difficult game. Is it better to buy a growth company today at 15x sales or a value company at 0.2x sales?

Well, that all depends on a) the growth trajectory of both companies going forward and b) what multiple investors will pay for that growth in the future.

Investing is not easy because neither of these are known today. Even if one could predict Peloton and Ford’s growth rate over the next year (no easy task) it would be impossible to know what investors would pay for it (sentiment), and that part of the equation (the “voting machine”) is the more important driver of returns in the short run.

Is Peloton’s continued high growth rate inevitable? It may seem so today but that is often the case with high growth companies. It is hard to envision anything interrupting that phenomenal growth because the story behind it is so strong.

Back in 2015, there was another company in the health and fitness space with high growth expectations and a great story: Fitbit. You may of have heard of it.

When it went public in June of 2015, investors piled in with gusto.

The stock was on fire after Fitbit reported revenues of $400 million in the 2nd quarter of 2015, a 253% increase from a year earlier. By August 2015, its market cap had moved above $10 billion from $6 billion at its IPO.

Expectations for continued growth were high and investors were happy to pay up for that growth with a multiple of more than 8x sales.

It was deemed a tech stock that “can’t lose”…

What happened next?

While revenues continued to climb into the end of 2015 (peak of $711 million in Q4), its growth rate began to decelerate, turning negative by the end of 2016. And in tandem, the multiple investors were willing to pay moved lower.

Created in YCharts

Today Fitbit has a market cap of $1.7 billion, down 84% from its peak in 2015.

Created in YCharts

I know what many of you are thinking. Peloton is not Fitbit. It’s a better company/product and won’t suffer the same fate.

That very well may be true, but with expectations as high as they are today, they will have to do everything right in order to grow into the multiple investors are currently assigning to it.

With gyms closed longer than almost any other business and people forced to spend more time at home, Peloton had a once-in-a-lifetime catalyst for growth. They should be commended for taking advantage of this and were rewarded with its stock price more than tripling over the past year.

But that is the past and investing is always about the future.

It will be nearly impossible for Peloton to continue growing at the same pace going forward and nobody knows what will happen to demand once people start going back to gyms and when a vaccine is developed. We also don’t know if competitors or new entrants in the space will take share or drive margins lower.

Which is to say the future is unknown, and therefore investing is not easy, despite what you may have heard in the mania of the past few months.

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