Why Peloton (PTON) Stock Is Trading Up Today

What Happened:

Shares of exercise equipment company Peloton (NASDAQ:PTON) jumped 7.9% in the morning session as markets roared back after an initially muted response to the Fed's rate cut, which sparked a renewed appetite for risk assets. While investors were expecting a reduction in rates from the US central bank, there was a bit of back and forth on whether the cut would be 25bps (a quarter percent) or 50bps (half a percent). 

The Fed ended up slashing its policy rate by 50bps (0.5%) to 4.75%-5.00%. This marks the first rate reduction in roughly four years. As a reminder, the Fed--under Chair Jerome Powell--began raising rates to tackle inflation coming out of the COVID-19 pandemic when a confluence of supply chain disruptions, labor shortages, and stimulus spending caused inflation to run hot. 

Looking forward, the Fed signaled that more cuts are possible in 2024/25. Putting it all together, the announcement and outlook provided a breath of fresh air and a clearer view of the Fed's monetary policy stance, which the market has been waiting for with bated breath. If there's anything the market doesn't like, it's uncertainty. 

As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher-growth stocks such as those in the technology sector, where the current value depends more on cash flows many years out in the future.

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What is the market telling us:

Peloton’s shares are very volatile and over the last year have had 59 moves greater than 5%. In context of that, today’s move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The previous big move we wrote about was 28 days ago, when the stock gained 18.2% on the news that the company reported second quarter earnings results. Peloton beat analysts' revenue and EPS expectations. The company is undergoing a turnaround, and it grew sales in the quarter compared to the prior year, a first in more than two years. While its full-year revenue guidance missed Wall Street's estimates, adjusted EBITDA guidance was better. Free cash flow was also positive, an improvement on the cash burn reported in the same period last year. Overall, this was a good and encouraging quarter for a company that has struggled mightily in the past few years.

Peloton is down 18.7% since the beginning of the year, and at $4.73 per share it is trading 29.7% below its 52-week high of $6.72 from January 2024. Investors who bought $1,000 worth of Peloton’s shares 5 years ago would now be looking at an investment worth $183.42.

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