Stocks exhibited solid gains on Friday, continuing their rally in reaction to solid third quarter earnings and stable interest rates. But it wasn’t always sunshine for every company. Two companies that stumbled were Beyond Meat and Peloton.
Some years ago, I was in conversation with a marriage counselor. She noted that in difficult divorce situations emotion dominated near-term behavior, but in the long run, facts rule. The same can be applied to the stock market. To make my point, I will use both Beyond Meat and Peloton as examples. Both companies had exciting stories to tell. Beyond Meat was the first major start-up promoting vegetarian meat substitutes for hamburgers, not only in supermarkets, but also to major restaurant chains. Peloton introduced spin bicycling to the home market, marrying a spin bicycle to a video screen that interacted with streamed instructors and other “classmates” on your at-home spin class. Both clearly played upon emotional frenzies, one for healthier food, the other for a healthier body. Peloton in particular got a huge kick start from the pandemic that closed most cycling studio and gym alternatives.
Emotionally, both were must-have investments. Both more than tripled their already lofty IPO prices. Emotionally, both were absolute winners. Investors love hot trends. Nothing was hotter than a bona fide healthy meat substitute or a home exercise machine par excellence in a time of pandemic. But what about the reality? Neither made money. Neither was going to make money anytime soon. And while the emotions spoke loudly, what about the reality? Was Beyond Meat going to drive vegetarians to McDonald’s? Did it actually taste as good as a Quarter Pounder? A Peloton cycle was the best substitute for a gym. But what would happen when gyms reopened? Was it going to be a one-product company or did the combination of machine and digital lend itself elsewhere?
The emotion attached to the excitement of a hot new product driving short-term stock market performance, more than offset any rationality tied to long-term valuation. Then the fear of being left out took over. Buyers who knew the name and loved the sizzle climbed aboard. The rational investor who thought valuations were dopey at the beginning looked awfully foolish.
Eventually, it mattered that Beyond Meat burgers looked good but tasted OK at best. The fad that every fast food restaurant was going to offer meat substitutes faded as sales didn’t reach targets. Sales stopped accelerating. In some places, they actually began to fall. Chains like McDonald’s, that strive to limit the number of menu items, now must decide how important burgers made with meat substitutes are to its overall image. They may not want to be the first to drop the substitute burgers, but unless demand reignites, it’s only a matter of time. Beyond Meat will still find its constituency; there are lots of vegetarians and vegans who will be buyers. But there simply won’t be enough of them to justify a valuation close to today’s levels, much less close to where it was at its recent peak.
The same goes for Peloton. It’s a great bike. It fills a niche. It has its true believers. But can the demand keep growing now that gyms are all open again? More simply said, who’s left to buy a Peloton who hasn’t already bought one? The company tried to move to treadmills, but treadmills aren’t the same as a spinning bike. Have you been to a spinning class? 10-40 enthusiasts bike together, focused on an energized leader orchestrating 45–60-minute classes against a backdrop of pulsating music. The instructor and the music can be replicated at home. It isn’t a perfect substitute, but then again, you don’t have to go to a gym or pay gym membership fees. Have you ever been to a treadmill class with dozens racing to a pulsating rhythm amid loud music? Neither have I. Treadmills aren’t spinning bikes as Peloton and its investor friends quickly found out. There are Zumba and Step classes, but I don’t need Peloton to sell me a step. As the Pandemic fades, so does the desire to buy a new Peloton bike. There is nothing wrong with the company. It simply will have to be resized to a much smaller base. That goes for its stock as well.
Investors often forget that they are buying companies, not single product ideas. Great companies may start with a product or an idea, but they must build upon it. Sometimes, often, they can’t. Microsoft# started with Windows. It then added its Office Suite of Applications. It then went from supporting standalone computers to networks, from supporting one user to supporting the enterprise. Then came the cloud. Amazon# started selling books over the Internet. Netflix sent you movie discs through the mail. Imagine what its future might have been if it stopped there.
Sometimes, there is no follow-up to the one trick pony. Where does Beyond Meat go institutionally beyond the vegetable-based burger. How many more meat substitutes can it make? The same goes for Peloton. The same may even go for Tesla if all its future holds is to sell EVs. It already sells for a greater market cap than Ford, GM, and Volkswagen combined. Clearly, Tesla’s future lies beyond the car itself. We will find out where over time or there will be a lot of unhappy shareholders.
Of course, there is another message here. Think for yourself. Don’t follow the herd if the herd is going the wrong way. Stocks won’t go up forever. Neither will Bitcoin. PayPal may let you pay for a transaction with Bitcoin, but the real question is what percent of transactions made now or in the future are done with Bitcoin. And when will goods be priced in Bitcoin? At best, cryptocurrency is still very much an unknown. There is no doubt that currencies will become increasingly digitized. We know that because most of us carry very little cash. New applications like Venmo and Zelle facilitate the transfer of digital dollars. But what is the role of Bitcoin other than a currency of speculation? Maybe there is an answer and maybe there isn’t.
What we do know is that one day in the future, there will be a bear market. There will be another recession. When that happens, speculative fever will die down and the real will be separated from the wannabes. I don’t know when. It certainly doesn’t appear likely this year or next. Maybe, if inflation stays more persistent than most expect, it could happen sooner than we think. Right now, chasing the speculative craze is rewarding. Eventually, low tide will expose who’s swimming naked. In the short run, emotion trumps reality. In the long run, reality rules. Good thoughts to remember as stocks continue to set record highs.
Today, NCIS’s Sean Murray turns 44.
James M. Meyer, CFA 610-260-2220