What 2019 Taught Us About IPOs & How to Turn That Into Gains in 2020

IPO Hype Cuts Both Ways

Don’t believe the hype. It’s a classic cliché that, when applied to the stock market, usually means don’t be taken in by all the glitz and glam; look for substance.

There’s also a flip side to positive hype. Sometimes people hype up how disappointing a company is. In both cases, sometimes the hype isn’t totally truthful.

That said, let’s take a look at Peloton Interactive Inc (NASDAQ:PTON) and what lessons PTON stock can teach us about initial public offerings (IPOs).

Peloton is known for its $2,000 exercise bicycles that allow people to feel as if they’re in a class at home, thanks to a built-in screen. It’s a novel idea, especially considering just how fitness-crazy our society has become over the years.

Many were quick to label Peloton stock a failure right out of the gate.

Citron Research’s Andrew Left, a notorious short seller, compared Peloton unfavorably to companies like GoPro Inc (NASDAQ:GPRO), whose stock has absolutely collapsed since hitting the market. (Source: “Beaten-Down Peloton Stock Is a Buy, Analyst Says,” Barron’s, January 2, 2020.)

“We promise that we will look back in 3 years and remember Peloton as a $10 billion company and our only regret will be that we were not short more,” wrote Left in December.

The thinking goes that Peloton is a company that is grossly overvalued and losing money, a deadly combination on the stock market. The company lost $49.8 million in its first quarter of 2020. (Source:”Peloton shares seesaw after first earnings report since IPO,” CNBC, November 5, 2019.)

Analysts love to pile on when a tech company is losing hundreds of millions of dollars while rising in valuation; many will call on investors to short it.

But those analysts are missing the forest for the trees.

In Q1 2020, Peloton Interactive Inc’s revenue more than doubled year-over-year, reaching $228.0 million. Meanwhile, the company reduced its net loss to $49.8 million ($1.29 a share), from a loss of $54.5 million ($2.18 per share) a year earlier.

So, while we’re not seeing a profit quite yet from Peloton, that doesn’t mean the the company is doomed, no matter how much analysts proclaim it to be so.

Also in the quarter, the company doubled its users with paid subscriptions to more than 560,000.

Furthermore, the company is anticipating around $1.5 billion in revenue this fiscal year.

While management says it’s prioritizing growth over profits for now, it’s confident that the company will see a balanced revenue sheet sooner rather than later.

“I believe if we pulled back on growth, we could be profitable tomorrow,” said Peloton CEO John Foley.

“We believe the global opportunity is so big that we’re on the right balance of investing for future growth.”

And Peloton stock has since been on a bit of a tear, skyrocketing by as high as 48% in November before falling back to Earth.

Chart courtesy of StockCharts.com

As it stands, PTON stock has shown a very modest three percent gain over its IPO price, but based on what you’ve likely read about the company, you’d think it was an absolute disaster.

I’ve seen many analysts lumping Peloton in with WeWork Companies Inc., a spectacular failure that wasn’t even able to undergo an IPO before imploding.

And that’s where the lesson is for 2020 IPOs: don’t believe the hype in either direction.

Some companies will promise the moon and the stars and only have growth numbers, without a whole lot else to back up its claims. They’ll be unable to show a path toward profitability and instead will promise eternal growth, which is a fantasy.

On the flip side, as has been the case with Peloton stock, we often hear the words “bubble,” “flop,” and “fad”—inaccurately painting many tech companies with the same brush.

The key in both instances is to take a peak under the hood. It doesn’t take a lot of research to see that PTON stock is in a strong position, nor does it take long to spot a dud when you give it careful consideration.

In order to profit from IPOs in 2020, the key is to look at the finer details of the company, the main considerations being growth and profitability (or at least the potential for profitability).

Investors want to either see immense growth with a path to profitability, or strong growth while losses are declining (or at the very least being managed in accordance with said growth).

Which is to say that investors might not mind a company losing money at first, so long as that lost money isn’t being wasted. If is being spent well, investors are more than happy to reward stocks with long and healthy spans of price increases.

For the 2020 IPOs, that’s going to be as true as ever.

Analyst Take

I tend to believe that the media will over-hype certain stocks, much to the peril of investors.

And that does happen. But so too can the media fall into narrative cycles in which it unfairly lumps together multiple stocks due to their proximity in IPO date or industry.

We’ve heard a lot of bad press surrounding Peloton Interactive Inc as a company, but Peloton stock has been going strong, especially considering that so many 2019 IPOs in the tech space proved to be weaker than anticipated.

Investors, then, need to poke around behind the scenes and not get caught up in the hype. It’s like Warren Buffett always says: do your research.