Don't Buy the Peloton Dip—Too Much Still in Question

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May. 6 2021, Published 2:18 p.m. ET

After numerous injuries and one child's death related to the use of one of its treadmills, Peloton (NASDAQ:PTON) has issued an all-out recall for its Tread and Tread+ products. While the recall is voluntary, the event has led to a sharp drop in the market value for Peloton stock.

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The strategy of buying the dip is an investing tactic that's often used in intermediary downfalls amid long-term growth. Buying the dip can drastically improve long-term returns for investors. However, Peloton shareholders might have a lot more to lose, which could make buying the dip an unwise strategy right now. 

Peloton could lose billions amid sweeping treadmill recall.

Not only will Peloton have to pay for every treadmill consumers choose to recall (up to 125,000 units, with each one costing anywhere from $2,495 to $4,256—that's an estimated $421 million in product revenue loss alone). There's also the issue of market capitalization. When investors sell a stock en masse, the company's overall market value sinks. Such is the case with PTON stock, which has lost 43.3 percent of its value YTD.

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Peloton (PTON) stock valuation is way down.

Despite delayed action from Peloton CEO John Foley, the company has been publicly battling treadmill safety concerns since March. The Consumer Product Safety Commission initially requested that Peloton recall its premium treadmill product that was tied to the child's death—the Tread+. Numerous injuries occurred months beforehand, which is why the stock started dropping around the beginning of January.

The most drastic dip occurred when the recall was announced on May 5. PTON stock lost 15.52 percent in a single day. 

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Is Peloton undervalued now?

Peloton stands to release its fiscal third-quarter earnings after market close on May 6. The losses are expected to narrow, while the company's revenue is expected to jump. However, the recall situation will eat into its subsequent earnings. For that reason, Peloton has a long way to climb.

A forecast for Peloton (PTON) stock

Peloton's sentiment is shrinking, while the short interest is rising. The short-interest ratio is up 4.94 percent from the previous month. This makes the total shorted percentage of floated shares 8.48 percent. With how short-sellers are acting, the current dip isn't expected to stay a dip for much longer.

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Investors shouldn't get in on Peloton (PTON) stock yet.

This isn't the be-all-end-all for Peloton. The key flaws in its treadmill design (namely a gap between the moving belt at the bottom of the treadmill and the floor it sits on) are fixable. However, this next year will ruffle the feathers of some risk-weary investors. Waiting until the fiscal fourth-quarter earnings might be more apropos for those seeking a bit of predictability.

What price to buy Peloton (PTON) stock at

As of mid-afternoon on May 6, PTON stock is at $82.22 per share. When it reaches the lows it hit in August 2020 (about $64.96 per share), investors might want to revisit the stock's chart and predictions again.

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