When Peloton (PTON) went public on Sept. 26, 2019, its share price was $29. On its opening day, fortune didn’t favor PTON its value dropped 11 percent by the close of the day. Not to worry, the market thought, since the IPO raised $1.16 B and the company was valued at $8.1B.
From early on, Peloton has been beset with lawsuits. One of the earliest was the $150M lawsuit, filed shortly after the IPO, accusing PTON of copyright infringement. Ten music publishers claimed PTON had unlawfully streamed music without paying for licensing. Predictably, the company settled in late 2020 for an undisclosed amount.
PTON has also been hit with a patent lawsuit from Mad Dog Athletics, Inc. (inventor of the first spin bike), but the judge threw the suit out of court. Another suit was filed by ICON Health & Fitness, the manufacturer of NordicTrack equipment, claiming patent infringement. This suit was probably in retaliation to Peloton’s suit against ICON filed in May 2020. The two rivals currently have two suits still in litigation.
Another class-action suit was filed in mid-2021 by Peloton owners in New York, Massachusetts, and Virginia, claiming PTON improperly charged them for sales tax. In those three states, digital goods are not taxed.
The COVID-19 Boost and Bust
The COVID-19 pandemic had a short-lived beneficial impact on PTON. In 2020, its stock jumped 66 percent, thanks to the months-long quarantine and the closure of gyms across the U.S. This made many investors bullish on the company.
Fast forward to 2021, when PTON’s share price slumped in August after the company reported “material weakness” in financial reporting. It declined even further in November when its Q1 ’22 report revealed the company dropped its revenue guidance from $5.4 billion to $4.4 billion.
Tread Recall, Another Setback
In May 2021, the U.S. Consumer Product Safety Commission and Peloton announced two recalls for the Tread+ and Tread treadmill lines.
The recall occurred after the tragic death of a six-year-old child and 70 injuries. The recall reason, stated by the CPSC, was that adult users, children, pets, and objects could be pulled underneath the rear of the treadmill, posing a risk of injury or death.
Peloton issued a full refund to each owner. At the time of the recall, some 125,000 units had been sold. That’s approximately $358M in refunds. The Tread+ is still under recall, but recently Peloton re-released an improved basic Tread.
New Securities Class Action Filed
PTON continues to take the hits. Also in November, the at-home fitness equipment and interactive media brand, and its top executives, were hit with a class-action suit in the U.S. District Court for the Southern District of New York.
The Plaintiff, City of Hialeah Employees Retirement System, alleges Peloton mismanaged its inventory and made false statements about the company’s ability to maintain growth. According to Plaintiff, investors lost $8.1B in just one day.
1 Chart Predicted This Bad News
One type of chart predicted this astounding share price crash well in advance and very likely saved savvy investors a bundle when they cashed out. This chart is called a candlestick chart, which tracks and compares a stock’s low, open, close, and high of the day.
Candlestick charting was originated by Munehisa Homma, a Japanese trader, way back in the 1700s. The methodology is based on what is now called the Sakata Rules, which are actually based on a Japanese cultural belief of the time that the number three was propitious, or even divine. Sakata’s Rules are:
- Three Mountains – when the middle candlestick is lower than the other two, expect a reversal.
- Three Gaps – when opening price trends are higher or lower than the close of the last candlestick, creating a gap on the chart, the trend is changing.
- Three Rivers – which can be either bearish or bullish.
- Three Methods – can also be bullish or bearish and predicts the security’s trend.
- Three Parallel Lines – when three candlesticks are going the same direction. This can also be bullish or bearish.
Homma famously believed that if an investment looked good, an investor should wait three days before trading. Probably good advice, even in the 21st Century.
Looking at PTON’s Candlestick
PTON showed warning signs as early as March 2021, when its chart showed the ominous Three Black Crows combination, foreshadowing a negative reversal. One happened in August, another in October, and yet another in November. More signs of trouble ahead were the Three Outside Down combination, occurring both in October and November.
— TrendSpider (@TrendSpider) November 17, 2021
Peloton hit its stock price high almost a year ago at $171 a share in mid-January 2021. In August 2021, it showed a definite pennant pattern, forecasting its crash in value. Hindsight is foresight, the sages say, but if an investor wants to make sure they avoid a devastating loss, follow the candlestick and look for any pennant patterns. If one emerges, wisdom says sell.
Can PTON Bounce Back?
Without a functioning crystal ball, it’s difficult to say, but most investment advisors are likely telling their clients to avoid investing in PTON, even while it’s at near-historic lows.
Peloton has created an innovative home fitness line of products, beginning with its interactive stationary bike, and is building its family of products to include workout wear, accessories such as bike shoes, subscriptions to classes (live and on-demand), and an interactive app.
However, its competitors are many, technology continues to advance at lightning speed, and CEO John Foley is likely being scrutinized by his Board. All signs point to an ongoing bumpy ride at Peloton.